FX comment – NZD slumps as rate hike expectations delayed

by: Roy Teo

New Zealand dollar slumps as rate hike expectations delayed

The New Zealand dollar slumped by almost 80 pips to 0.7840 early this morning after inflationary pressures in New Zealand declined more than expected in the third quarter. The inflation print of 1.0%yoy was lower than market expectations of 1.2%yoy (from previous quarter 1.6%). This is also lower than the Reserve Bank of New Zealand’s projections of 1.3% in the September MPS. The main contributors to the decline were audio-visual and computing equipment. On the other hand housing and household utilities prices increased. Looking ahead, we expect inflation to gradually rise in the coming quarters supported by housing market, firm domestic economy and weaker currency. As such the RBNZ is still expected to resume its monetary tightening cycle in 2015, though the risk of a move in Q3 rather than Q2 (base case scenario) has increased. On the currency, the relief rally in the NZD/USD which started in early October seems to be over with prices forming a new lower top of 0.8034 on 21 October. We continue to expect a lower NZD/USD towards 0.77 and 0.73 by the end of 2014 and 2015.