NZ 1Q CPI below 7% for first time in three quarters; still too high for comfort. NZD softer against major peers, largest decline vs AUD; falls over ¾ percent. US equities, yields dollar fall amidst multiple softer than expected data

By Stuart Talman, XE currency strategist

Soft jobless claims, regional manufacturing and home sales data has halted the advance of US bond yields causing the dollar to ease against most of its major peers. US equity markets follow a similar path to the prior day, opening lower before paring losses through the New York afternoon.

The New Zealand dollar and the Norwegian Krone the two G10 currencies that have logged intraday losses against the dollar, the Kiwi plunging during local trade on the back of weaker-than-expected 1Q CPI data.

Falling to a 5-week low through 0.6150 during the Asian afternoon, NZDUSD has pared most of its CPI-induced losses, ascending back through 62 US cents, shedding around a quarter-of-a-percent.

The annual inflation rate for the local economy rose 6.7% for the March quarter (vs 7.1% expected), the smallest gain in consumer prices since the fourth quarter of 2021. It’s the second quarter that inflation has fallen short of the RBNZ’s forecasts (7.3% for 1Q) but likely does not alter the likelihood of a 25bps hike at the 24 May meeting.

Yes, it’s encouraging that inflation peaked at 7.3% in the second quarter of 2022 and has now meaningfully receded following 7.2% prints in each of the previous two quarters, however inflation remains far too high for comfort.

Predictably, the Kiwi’s largest net move occurred against its trans-Tasman peer, the rate sensitive NZDAUD cross falling around three-quarters-of-a-percent, marking Thursday’s low a pip or so below 0.9160. It’s the lowest the antipodean cross has traded in 7 weeks.

We commented earlier in the month, following the RBNZ’s shock 50bps hike, that the bar was now set significantly higher for another RBNZ hawkish surprise and that despite many calling an end to the RBA’s tightening cycle, Australia’s central bank may have a further one or two hikes to deliver.

We would not be surprised if the RBA lifts the cash rate to 3.85% on 02 May, further extending AUDNZD downside towards 0.90.

Central bank policy aside, the Aussie may outperform the Kiwi through the second half of 2023 and beyond as the Kiwi economy struggles to avoid recession given the RBNZ’s more aggressive tightening cycle.

Looking to the day ahead, its PMI day, flash readings of manufacturing and services activity for the US, UK and eurozone economies. The common themes amongst these major economies – manufacturing is in contractionary/recessionary levels (sub-50.0 reading); services is holding up much better under the weight of synchronised central bank tightening; and the past few months (particularly for the UK and EU) have delivered a rebound in activity.

Other data points and events to note as we close out a relatively uneventful week – UK retail sales and central bank-speak.

It’s the final day that Fed officials can speak as they enter the black-out period ahead of the 03 May FOMC meeting. Whilst Fed officials differ in their degree of hawkishness, one constant message amongst the procession of speeches, interviews, and Q&A sessions over the past couple of weeks – more work must be done to bring down inflation, a 25bps hike will be delivered in May and the terminal rate will be held at its peak for some time.

Having logged almost identical ranges through Tuesday and Wednesday to then trade below the range through Thursday, NZDUSD price action suggests that further downside beckons as NZD bears build some mild momentum.

Trading below 0.6180 support, our next key downside level to monitor is 0.6140, a level that formed prominent lows in late February and again in mid-March. A break below here increases the likelihood of a test of the year-to-date low at 0.6084.

Until we breach this low or find a foothold above 63 US cents, the neutral bias is sustained.

Stuart Talman is Director of Sales at XE. You can contact him here.