Stronger Than Expected NZ 3Q Inflation
The release of 3Q Inflation data for New Zealand surprised markets last night with a stronger than expected print of 0.2% QoQ vs. 0% expected. Rate cut expectations continued to build ahead of the meeting with rates markets pricing around an 85% chance of the RBNZ easing at their next meeting.
Reduced petrol prices and lower vehicle registration fees were the main drags whilst housing related costs continued to rise. Although most underlying inflation improved slightly, they broadly remain new the bottom of the RBNZ’s 1- 3% target range. Despite a bounce in NZD/USD in response to the data, it is worth noting that the data is in fact in line with the RBNZ’s own forecast and as such, a further rate cut in November can still be expected in line with Assistant Governor McDermott’s recent commentary.
Concerns Remain For RBNZ
New Zealand inflation remains dogged by lower petrol prices and the effects of a stronger NZD on elements such as international airfare and package holidays. Whilst inflation is still at subdued levels this latest data supports the idea that inflation bottomed out in H2 2015 and is now gradually recovering. Indeed, the YoY headline inflation rate is expected to move back over 1% in the coming quarters as prior Oil weakness drops out of the annual calculation.
However, a stronger NZD will continue to weigh on tradeable inflation and the primary risk for the RBNZ is that the protracted period of low inflation will further subdue inflation expectations, making the near 2% medium-term inflation target harder to achieve in a sustained manner. This was the key driver behind the RBNZ’s two prior cuts this year and remains a solid case for further easing this year.
For now, NZD/USD continues to remain within the broad bullish channel which has framed price action this year. The retracement lower over the last few weeks has found support into a rising bullish trend line, and prices are once again turning higher. This current rally will be closely watched by traders as it approached the .73 level which could potentially form the right shoulder of a larger head and shoulders pattern.
