New Zealand Dollar Turns to US CPI Report After RBNZ 50-Basis Point Rate Hi

The RBNZ has increased interest rates from 2.00 percent to 2.50 percent to keep inflation within the target range, and to maintain maximum sustainable employment. The central bank wants consumer price inflation to fall back into the target range by mid-2020. The next New Zealand CPI report is due on July 17, but the release can be tricky. The currency could still be in late stages, and the three-wave recovery can still be intact.

The US CPI report is also important for the New Zealand dollar, which is heavily sentiment-linked. A high reading from the CPI could bolster the New Zealand dollar, especially since the White House expects the US CPI reading to be higher than the current figure. The CPI rose 8.8% year-on-year in July, and this was a factor in the Fed’s rate hike of 75 basis points last week.

Meanwhile, the US dollar is under pressure as a result of a weaker USD. The recent surge in risk appetite has caused long-term global rates to fall. The US 10-year yield is now below 3% and the euro is near parity. The NZD is rebounding from overnight’s low, having dipped below 0.6140, but still remains weak against the JPY. Meanwhile, the US yield curve has flattened further, with the two-year minus 23bps gap.

Besides the US CPI report, the RBNZ’s sectoral factor model has also been raising expectations of inflation in New Zealand. While the RBNZ was concerned about the rising price level, it has also realized the importance of a lower unemployment rate. The RBNZ’s goal is to contain inflation. In May, the RBNZ raised rates 50 basis points and is expected to keep them there.

Despite the recent weakness in the NZ dollar, the global bond markets are still enjoying some benefit from the recent strength in US equities. The 10-year government bond closed Friday at a 7-year high, putting pressure on the NZD. Its rally is unlikely to last beyond this week. The EUR will continue its downward trend this week as it approaches parity against the NZD.

Another beat in the data could fuel tighter monetary policy expectations. Nonetheless, the New Zealand dollar remains vulnerable to volatility over the next 24 hours. The US Citi Economic Surprise Index remains profoundly negative, which means that analysts are still overestimating the strength and vigor of the US economy. Therefore, investors should continue to pay close attention to the New Zealand CPI report.

The New Zealand Dollar is likely to extend its downward trend on Friday, after confirming its break below the 0.6197-0.6227 support zone. Near-term support is the 61.8% Fibonacci extension at 0.6071 and breaking below this target exposes a 78.6% level at 0.5934. Despite this, the 20-day and 50-day Simple Moving Averages remain bearish. Should NZ rates continue their decline, they may act as resistance