Oct 16, 2023

Kiwi dollar bulls will have an inflation report released on Monday.

NZDUSD: Daily Chart

NZDUSD has been on a steady downtrend and may target the 2022 lows over the coming weeks.

Analysts expect inflation to dip by 0.1% to 5.9% in this report. The Kiwi could be vulnerable to further declines as investors consider the Reserve Bank of New Zealand’s policy plans. Easing inflation may force investors to reduce their expectations for another rate hike by the central bank, adding downward pressure to the kiwi.

“NZD risks remain skewed to the downside in our view,” said Carol Kong at the Commonwealth Bank of Australia. “The interest rate support for NZD has faded as we expect the RBNZ to keep the OCR unchanged until early 2025,” referring to the nation’s official cash rate.

With investors pricing in an 80% probability of another 25 basis-point interest rate hike from the RBNZ by April, there is room to unwind their hawkish bets, which would hurt the kiwi dollar. Policymakers have held rates steady at the same level for the last three meetings and said earlier this month that high rates are constraining economic activity.

“We don’t expect further tightening from the RBNZ,” said Mary Jo Vergara, senior economist at Kiwi Bank Limited. She expects a prolonged period at the current level. “Inflation is still high, but we see it continuing to decelerate. And there’s clear evidence that the labour market is loosening rapidly.”

Reducing investors’ hawkish RBNZ expectations is only one of a few headwinds for the currency. “Falling commodity prices, narrowing interest rate differentials, and weakening risk appetite are all working against the kiwi dollar,” said Vergara, who sees the currency at 55 cents versus the dollar by year-end.

A change of government in New Zealand was expected this weekend, and the business community had been anticipating that with the monthly ANZ business confidence survey jumping from a very low -70 level a few months ago to near zero in last month’s result.

New Zealand may not see much change in its interest rates, but other issues such as falling commodities and risk reduction could hurt the currency. Former businessman Christopher Luxon will be the country’s next prime minister after winning a decisive election at the weekend. The result ends six years of liberal government leadership, and the currency could get a boost from that early in the week.

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