New Zealand Dollar’s election gain nearly halved after US CPI

NZD/USD retreats to 0.5600, giving back some of Monday's post-election gains.
US rates are priced by traders at around 4.50%-4.75% by June, compared with 2.75% for the RBNZ.
Wednesday brings New Zealand's October card spending figures, with its PMI due on Thursday.

Nearly half of Monday's New Zealand Dollar advance has been erased following stronger-than-expected US consumer inflation. The currency initially dipped just below 0.5600 before recovering to that mark. Monday's rise had been supported by National's narrow lead in New Zealand's election count.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Following a larger-than-forecast increase in October US consumer prices, Kansas City Fed President Schmid said he could not see evidence of restriction from the Fed's policy rate outside housing. Markets are pricing in three quarter-point increases from current levels, taking the Fed rate to 4.50%-4.75% by June, compared with 2.75% at the Reserve Bank of New Zealand (RBNZ). Unless the RBNZ also changes rates, the US rate would stand 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 seat 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 a jobs objective. That expected outcome supported the New Zealand Dollar on Monday.

Which releases and speeches are next?

Tuesday's schedule includes a speech at 23:30 GMT by Philadelphia Fed President Paulson, a voting member on rates this year. On Friday, core US producer prices are due at 13:30 GMT, with a monthly rise of 0.3% expected after 0.7%. San Francisco Fed President Daly is then scheduled to speak at 17:00 GMT. These events will inform expectations for a December Fed rate increase, which traders already 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.

What do the charts indicate?

About 40% of the New Zealand Dollar's decline between its 22 October peak near 0.5700 and its 6 November trough just above 0.5500 has been retraced. Those two levels remain substantially below the late-August peak just under 0.6000, from which the currency has fallen more than 6%.

Daily chart for NZD/USD

New Zealand Dollar: Frequently Asked Questions

Which factors influence the New Zealand Dollar most?

Investors widely trade the New Zealand Dollar (NZD), commonly called the Kiwi. Although New Zealand's economic health and its central bank's policy broadly determine the currency's value, several more specific influences can also affect it. China, New Zealand's largest trading partner, is one such influence: developments in the Chinese economy tend to affect the Kiwi. Negative Chinese economic news is likely to signal reduced demand for New Zealand's exports, weighing on its economy and, in turn, its currency. Dairy prices are another important driver, as dairy is New Zealand's leading export industry. Higher prices raise export earnings, supporting both the economy and the NZD.

Why do RBNZ policy decisions affect the New Zealand Dollar?

Keeping medium-term inflation within a 1% to 3% range, preferably close to the 2% midpoint, is the Reserve Bank of New Zealand's (RBNZ) objective. It sets interest rates at a level suited to that goal. If inflation becomes too high, the RBNZ raises rates to slow economic activity. Higher rates also lift bond yields, making investment in New Zealand more attractive and supporting the NZD. Rate reductions, by contrast, generally weaken the currency. The gap between New Zealand's interest rates and those set by the US Federal Reserve, including expectations for that gap, is known as the rate differential and can be a major influence on NZD/USD.

Why are economic releases important for the New Zealand Dollar?

By helping investors assess the economy's condition, New Zealand's macroeconomic releases can influence the New Zealand Dollar's (NZD) value. Robust growth, low unemployment and strong confidence underpin a healthy economy, which supports the NZD. Strong economic growth draws foreign investment and, when accompanied by elevated inflation, may prompt the Reserve Bank of New Zealand to raise interest rates. Weak economic figures, on the other hand, are likely to put downward pressure on the NZD.

How does market risk appetite affect the New Zealand Dollar?

During periods of stronger risk appetite, the New Zealand Dollar (NZD) generally appreciates. When investors see limited risks across markets and feel optimistic about growth, the outlook for commodities and so-called ‘commodity currencies’, including the Kiwi, tends to improve. In periods of market volatility or economic uncertainty, the opposite usually occurs: investors sell riskier assets in favour of more stable safe havens, and the NZD tends to weaken.