New Zealand Dollar slide faces RBNZ inflation expectations test

• NZD/USD returns towards its 6 November low with a third consecutive daily decline.
• With the RBNZ holding rates at 2.75%, markets fully price in a December Fed increase.
• Tuesday brings the RBNZ’s quarterly survey of inflation expectations.

At around 0.5550, NZD/USD is trading just above Thursday’s low, having retreated for three consecutive sessions. The Kiwi’s post-election recovery on Monday lasted just one session, leaving the pair once again close to its weakest level in more than 18 months. It now sits below the starting point of Monday’s rebound and only a short distance above the 6 November low.

Further monetary tightening will be necessary, San Francisco Fed President Daly said on Thursday, although she gave no indication of its scale or timing. Futures markets fully price in a rate increase on 9 December. By contrast, the Reserve Bank of New Zealand (RBNZ) left its Official Cash Rate (OCR) unchanged at 2.75% on 28 October. With US rates at 3.75%-4.00%, a Fed increase would extend an interest-rate differential already measuring at least a full percentage point.

With nearly 400K votes still to be counted by 27 November, preliminary results from New Zealand’s 7 November election allocate 67 of 131 seats to National, ACT and New Zealand First, one more than required for a majority. Labour would restore employment to the RBNZ’s mandate. Against unemployment of 5.7%, that points towards lower interest rates for the Kiwi. Meanwhile, the Business NZ manufacturing index slipped from 56.5 to 54.9 in October, easing pressure on the RBNZ to follow the Fed’s lead.

Economic releases and central bank updates come into focus

Following September’s reading of 50.9, Business NZ’s services index is scheduled for 21:30 GMT on Sunday. Next comes the RBNZ’s Financial Stability Report at 20:00 GMT on Monday. Its quarterly inflation expectations survey, which informs the bank’s next rate decision, follows at 02:00 GMT on Tuesday, 17 November; the previous reading was 2.34%.

Before those releases, US producer price figures arrive at 13:30 GMT on Friday, followed by another speech from San Francisco Fed President Daly at 17:00 GMT. October retail sales are scheduled for 13:30 GMT on Tuesday, 17 November, with no change forecast after a 0.8% increase. Both data releases will feed into the Fed’s 9 December decision.

NZD/USD records successively lower rebound peaks

Rebounds have formed progressively lower peaks since August, reaching just below 0.6000 on 21 August, around 0.5700 in late October and 0.5650 on 10 November. On the daily chart, which begins in late June, the lowest level is the 6 November trough between 0.5500 and 0.5550. Four of the past five sessions have ended in declines for the pair.

Daily price chart for NZD/USD