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FX Analysis

NZD weakens, New Zealand’s inflation hits three-decade high

nz dollar

New Zealand’s fourth quarter CPI printed at 1.4% quarterly, and 5.9% annually, the highest in 30 years and well above the New Zealand Reserve Bank’s target rate between 1-3%.

The flaring inflation indicates the Bank will keep its expected pace to raise the OCR on a regular basis in 2022. The NZ Treasury markets have priced in 25 basis points each time the RBNZ meets.

However, the New Zealand dollar is not following the inflation moves, instead, showing further weakness against the US dollar and other major currencies. By the local time at 4pm, NZD was down 23 points against the US dollar, 36 points down against the Japanese yen, and 18 points down against the Eurodollar.

Two factors have been pressing on the Kiwi dollar. Globally, the Fed has finally started tightening of its monetary policy cycle from November, and the FOMC meeting overnight confirmed the Fed’s hawkish stance on its tightening pace. The US dollar firmed against all the other major currencies, especially the commodity currencies, which have a positive correlation to higher risk assets as stock markets slumped throughout the month.

Domestically, the omicron outbreak took the whole country back to a “red light” environment in Alert level 3, which might be causing business confidence to dip further. The ANZ Business Outlook Index in New Zealand recorded at -23.2 in December, and fell for the seventh straight month due to labor shortages, rising hiring costs, and supply chain disruptions.

Transport, Housing and Household Utility are the two biggest factors contributing to price increases, reflecting rising costs in fuel and housing prices are pressuring consumer spending.

The RBNZ is expected to raise the OCR by 25 basis points in its next policy meeting, due on 23 February. The NZ dollar could strengthen again if the Reserve Bank lifts the cash rate more than expected, by 50 basis points, but this is unlikely against the backdrop of a projected rapid spread of the omicron variant. 


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