- NZD vulnerable to further losses
- Impact of RBNZ rate hike still being felt
- Inflation dominates near term picture
- Technicals suggest further NZD upside difficult
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The New Zealand Dollar's near-term technical outlook is said to be "complicated" by one of New Zealand's largest lenders, where strategists look to Wednesday's all-important inflation data to offer fresh direction.
Analysts at ANZ say the NZ Dollar has relinquished its recent uptrend against a host of currencies and is now at key levels, which would potentially be resolved according to where inflation numbers land.
Consensus is for a 7.1% year-on-year print for first quarter CPI inflation this week, up on the previous quarterly reading of 5.9%.
They are due to be released at 23:45 on Wednesday.
ANZ's economists are forecasting a reading of 7.4%, which if met would represent a strong beat on expectations and potentially boost the value of the New Zealand Dollar.
"Whatever the headline figure, we suspect that ongoing rises in measures of core inflation (which are already far too high) will vindicate the RBNZ’s decision to hike 50bps last week in an effort to catch up to surging inflation," says economist Brian Martin at ANZ.
But the New Zealand Dollar fell last week after the RBNZ raised interest rates by 50 basis points, which at first makes for a counterintuitive currency market reaction as the text book suggests a currency rises when its central bank raises rates.
A number of other analysts we follow say the declines were because the market failed to increase the total number of rate rises it expected from the RBNZ in 2022 and 2023.
There is approximately 176 basis points of rises priced in for the remainder of 2022 by investors according to money markets, implying between three and four more 50 basis point hikes.
This is a hefty ask and could well stall economic growth, if delivered.
For rate hike expectations to start increasing again - which would reboot the NZ Dollar uptrend - the market would need to see stronger than expected domestic data come through, particularly inflation data.
This is why Wednesday's inflation number is a particularly important event for the New Zealand currency.
The New Zealand Dollar's decline following a hefty rate hike also sends a warning the currency is proving a little unpredictable at present: if it didn't rise following a strong rate hike, will it rise following strong inflation?
Looking at the market setup, strategists at ANZ say the technical picture presented by the NZ Dollar is "complicated".
"Technically, the NZD is now at a key level (0.6723 being the 61.8% Fibo of the January-April rally). A sustained break below could see a deeper trough, but equally, if it holds, that’d likely form a short term base. Complicated," says a weekly strategy note from ANZ. (Set your FX rate alert here).
Above: NZD/USD with "key level" 0.6723 annotated.
The note says the Pound to New Zealand Dollar exchange rate (GBP/NZD) will face upside resistance at 1.9474 and then again at 1.9940.
The pair is currently quoted at 1.9312 and is now well off the April 05 lows at 1.8713. "The NZD rates story is a bit exhausted and others are catching up," says Martin, referencing the already elevated expectations for RBNZ policy action.
Any returning weakness would potentially be supported at approximately 1.8639 and then 1.8616, according to ANZ.
Above: GBP/NZD daily with initial support and resistance lines annotated, as indicated in the text.
The New Zealand Dollar also continues to weaken against the Euro after last week’s spike and subsequent reversal.
A break above 1.6155 would put 1.6326 in play says ANZ.
Support is seen at 1.5527 and then 1.5243.
Above: EUR/NZD daily with initial support and resistance lines annotated, as indicated in the text.