Jason Wong, Currency Strategist at BNZ, notes that on Friday, the NZD broke out of the tight 0.6550-0.6750 range it had been trading in for most of February to the topside, but not for long.
Key Quotes
“The strong US activity and inflation data on Friday night was a friendly reminder of why we’re still of the mindset that the NZD will depreciate this year. This morning’s weak business confidence and inflation expectations data have slightly added to the weaker NZD tone.
US inflation is on the upswing and the Fed’s preferred core PCE deflator is showing an annual gain of 1.7%, close to the 2% target. The Fed’s message has been pretty clear – that it is looking to gradually tighten monetary policy over coming years. However, the market has become more complacent through this year so far, pricing out the chance of any tightening in 2016. The US inflation data give the impression that US policy tightening this year remains “live”. It wouldn’t take much for 1-2 tightenings this year to be priced back into the curve, and this would be negative for the NZD.
Meanwhile, the risk for NZ monetary policy has moved in the opposite direction. Last week we highlighted the record low in NZ inflation expectations relative to target. The prospect of the RBNZ meeting its inflation target remains a more distant prospect. NZ rates have been moving lower in anticipation of further rate cuts, but the NZD has been surprisingly resilient in February. The NZD has also remained resilient to the weaker Asian currency dynamic of recent weeks. We’ve previously noted the good relationship between the NZD and ADXY currency index.
We also closely monitor CBA’s weekly NZ commodity price index in USD terms and that fell for the seventh consecutive week through to 19 February. This all points to downside risk to the NZD when fundamentals come back into focus. Current fair value estimates are USD0.63 and AUD0.88.”
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