US CPI prompts New Zealand Dollar to relinquish nearly half its election gain

• At 0.5600, NZD/USD has retreated from Monday’s post-election advance.
• By June, traders see US rates around 4.50%-4.75%, compared with the RBNZ’s 2.75%.
• Wednesday brings New Zealand’s October card spending figures, with PMI due on Thursday.

Strong US consumer price figures have erased nearly half of Monday’s New Zealand Dollar gain, which followed National’s narrow lead in New Zealand’s election count. After dipping just below 0.5600, the currency edged back to that level.

Following a larger-than-forecast rise in October US consumer prices, Kansas City Fed President Schmid said he could find no evidence of restraint from the Fed’s interest rate outside housing. By June, traders expect the Fed’s rate to reach 4.50%-4.75%, implying three quarter-point increases from its current level, compared with 2.75% at the Reserve Bank of New Zealand (RBNZ). Unless the RBNZ also adjusts rates, that would leave the US rate 1.75-2.00 percentage points above New Zealand’s.

With nearly 400K special votes still to be counted by 27 November, projections give National and its partners 67 of 131 seats, one more than required for a majority. Markets anticipate that a National-led government would retain the RBNZ’s sole focus on inflation, whereas Labour had promised to introduce an employment objective. Expectations of that outcome supported the New Zealand Dollar on Monday.

Markets Await Fed Speakers and Economic Releases

Tuesday’s schedule includes a speech at 23:30 GMT by Philadelphia Fed President Paulson, a voting member on interest rates this year. On Friday, core US producer prices are due at 13:30 GMT, with a monthly increase of 0.3% expected following 0.7%. San Francisco Fed President Daly then speaks at 17:00 GMT. These events will inform the outlook for a December Fed rate increase, which traders regard as a certainty.

Following September’s 0.4% decline, New Zealand’s October card spending figures will be released on Wednesday at 21:45 GMT. Thursday brings the Business NZ Purchasing Managers Index (PMI) at 21:30 GMT, following a reading of 56.5. Both releases will inform the RBNZ’s decision on 9 December, when the Fed also announces its decision.

New Zealand Dollar Recoups Part of Its Decline

About 40% of the New Zealand Dollar’s decline between its 22 October high near 0.5700 and its 6 November low just above 0.5500 has been recovered. Both levels remain well short of the late-August peak just below 0.6000, since which the currency has fallen by more than 6%.

Daily NZD/USD price chart