NZD/USD sinks as disinflation trend adds to case for RBNZ jumbo rate cut

• New Zealand inflationary pressures have returned to the RBNZ target band for the first time in 3.5 years
• CPI rose 2.2% over the year, a tenth below RBNZ forecasts
• Core inflation eased to 3.1%, helped by housing-related disinflation
• Markets debating whether the RBNZ will cut 50 or 75 in late November
• NZD/USD eases towards known support level

Overview

New Zealand consumer price inflation (CPI) fell to the lowest level since early 2021 in the September quarter, seeing markets retain the view the Reserve Bank of New Zealand (RBNZ) will deliver another jumbo rate cut in November. NZD/USD has moved back towards range lows ahead of another key inflation measure.

Back in the band, finally

Headline CPI rose 0.6% over the quarter and 2.2% over the year, leaving the annual rate within the RBNZ 1-3% target band for the first time since early 2021. Importantly, it the annual increase was a tenth below the 2.3% pace forecast by the RBNZ back in August.

Source: StatsNZ

The decline in headline CPI was once again driven by tradable prices which are generally influenced by global factors which fell 0.2% for the quarter and 1.6% over the year, the latter sliding into outright deflation for the first time since the December quarter 2020.

Non-tradable prices which largely reflect domestic factors remained sticky, rising 1.3% for the quarter and 4.9% over the year. Despite the slow nature of returning domestic-led inflationary pressures towards the RBNZ target, the annual increase was the smallest in three years.

There was also good news on underlying inflationary pressures which rose 1% for the quarter and 3.1% over the year. Attention will now turn to the RBNZ’s preferred underlying inflation measure – its sectoral factor model – which will be released at 3pm Wellington time on Wednesday.

This figure has generated more market volatility than the actual inflation report in the past, so keep it on the radar if trading NZD/USD.

RBNZ jumbo cut on the agenda

With clear evidence that disinflationary pressures remain intrenched, the question now is how will RBNZ policymakers respond with only one further monetary policy meeting scheduled over the next three months?

Heading into the inflation report, markets already deemed a 50 basis point rate cut as a lock, adding to the 75 basis points of easing already delivered this cycle. With such a pronounced gap between interest rate meetings, don’t be surprised if we see markets start to price in a meaningful risk of a 75-point cut being delivered on November 27.

Right now, markets see a 50 or 75 as a coin-flip with a whopping 61.2 basis points worth of rate cuts priced into overnight index swaps (OIS) markets for the November meeting.

Source: Bloomberg

NZD/USD sinks towards range lows

The softening inflation picture has weighed on the Kiwi dollar in early trade on Wednesday, seeing NZD/USD push back towards the recent range lows.

Aside from a false break back in August, the pair has been very respectful of .6049 in the past, providing a level for traders to build setups around. If the price holds above the level, you could buy targeting a push towards .61094, another level that has acted as both support and resistance recently.

Alternatively, if .6049 were to be broken cleanly and hold there, you could sell below the level with a tight stop above for protection. The initial target would be .5985.

I expect the impact of the inflation report will fade quickly into the background today with the US interest rate outlook especially influential on movements across the FX universe right now, especially for longer-dated yields. That puts US economic data and Fed commentary firmly in the driving seat for NZD/USD near-term. 

-- Written by David Scutt

Follow David on Twitter @scutty