The Kiwi has seen plenty of demand yesterday and across the European open today following and stronger-than-expected set of inflation expectations data yesterday. Inflation expectations for Q4 surged higher to 3% from the prior quarter’s 2.3% reading. At this level, inflation expectations are now at their highest level in 10 years. The data come shot on the back of the latest inflation data showing that annual CPI is now at 4.9%, well outside the Reserve Bank of New Zealand's (RBNZ) 2%-3% target band.
NZ Data Continues To Improve
Data out of New Zealand has been steadily improving lately. Indeed, despite the fresh lockdowns introduced in response to resurgent COVID levels, wages growth and employment levels increased over the year, and unemployment was seen falling to 15-year lows. One of the stand-out releases was real GDP growth in Q2 which came in higher than the RBNZ projected. In all, data suggests that the recovery in New Zealand is happening at a quicker than expected pace.
RBNZ Expectations
In light of this latest set of data, tightening expectations have now increased ahead of next week's RBNZ meeting. The central bank has been among the most hawkish in the G10 space and was the first to move on rates following the massive easing over the pandemic so far.
The RBNZ's headline OCR is currently sitting at 0.50%, which is around 1.50% below what the bank deems to be the neutral level. The last set of projections from the bank projected that the OCR would be back up at the neutral level by the end of 2023. However, with inflation soaring and the economic recovery continuing to advance, there is a strong case for arguing that the RBNZ will need to quicken the pace of its tightening operation. With this in mind, clear upside risks are going into next week's RBNZ meeting.
Hawkish Risks
The base case scenario next week is now for a .025% hike. However, an increasing number of players are now highlighting risks that the bank hikes by 0.50% in response to recent data. Such a move would be firmly bullish for NZD. At this stage, a 0.25% hike would likely be seen as a little lackluster unless it's accompanied by an upgraded set of guidance signaling a more aggressive tightening plan.
Technical Views
AUD/NZD has been grinding lower within a well-defined channel following the reversal from Q1 highs. Price is currently sitting on support at the 1.0328 level. However, with both MACD and RSI turned lower here, the focus is on a break of support and a continuation lower, targeting 1.0328 and 1.0279 beyond, with the channel low in that area.
