Nearly half of New Zealand Dollar’s election gain erased on US CPI

0.5600 is back in view for NZD/USD as Monday's post-election advance fades.
4.50%-4.75% is the US rate range priced by traders for June, compared with the RBNZ's 2.75%.
October card spending in New Zealand is due on Wednesday, with PMI data following on Thursday.

NZD/USD has returned to 0.5600. The pair edged back to that level after briefly falling just below it, surrendering nearly half of Monday's gain following strong US consumer price data. National's narrow lead in New Zealand's election count had supported the New Zealand Dollar on Monday.

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

4.50%-4.75% is the Fed rate range traders now price for June, implying three quarter-point increases from current levels. That compares with 2.75% at the Reserve Bank of New Zealand (RBNZ). Unless the RBNZ also adjusts rates, the US would hold a 1.75-2.00 percentage point advantage. Following a larger-than-expected rise in October US consumer prices, Kansas City Fed President Schmid said he could see no restrictive effect from the Fed's rate outside housing.

67 of 131 seats are projected for National and its partners, one above the number required for a majority. Nearly 400K special votes remain to be counted by November 27. Whereas Labour had promised to introduce a jobs objective for the RBNZ, markets anticipate that a National-led government would retain inflation as its sole focus. That prospect underpinned Monday's rise in the New Zealand Dollar.

December 9 Decisions: Data and Speakers Ahead

At 23:30 GMT on Tuesday, Philadelphia Fed President Paulson is scheduled to speak; Paulson has a vote on rates this year. Friday brings core US producer prices at 13:30 GMT, with a monthly increase of 0.3% expected after 0.7%. San Francisco Fed President Daly then speaks at 17:00 GMT. These events will inform expectations for a December Fed rate increase, which traders regard as a certainty.

A 0.4% decline in September precedes New Zealand's October card spending release, scheduled for 21:45 GMT on Wednesday. Next is the Business NZ Purchasing Managers Index (PMI), due at 21:30 GMT on Thursday following a reading of 56.5. Both releases will inform the RBNZ's December 9 decision, which falls on the same day as the Fed's.

40% Recovery: NZD/USD Technical Picture

About 40% of the New Zealand Dollar's decline from its October 22 high near 0.5700 to its November 6 low just above 0.5500 has been recovered. Both levels remain well short of the late-August peak just below 0.6000. The currency has shed more than 6% from that high.

NZD/USD: Daily Price Chart

New Zealand Dollar: Frequently Asked Questions

New Zealand Dollar: Main Exchange Rate Drivers

Known as the Kiwi, the New Zealand Dollar (NZD) is a familiar currency among investors. New Zealand's economic health and central bank policy largely shape its value, although several distinctive factors also influence its movements. As China is New Zealand's largest trading partner, developments in the Chinese economy tend to affect the Kiwi. Negative economic news from China is likely to reduce demand for New Zealand's exports, weighing on its economy and currency. Dairy prices are another important driver, given the industry's position as New Zealand's main export sector. Higher dairy prices lift export earnings, supporting both the economy and NZD.

1% to 3% Inflation Target: RBNZ Policy and the New Zealand Dollar

A medium-term inflation range of 1% to 3%, centred on the 2% mid-point, is the Reserve Bank of New Zealand's (RBNZ) objective. The bank sets interest rates at a level intended to achieve and sustain that target. When inflation is excessive, it raises rates to slow the economy. Higher rates also lift bond yields, making investment in New Zealand more attractive and supporting NZD. Rate cuts, by contrast, generally weigh on the currency. NZD/USD can also be strongly influenced by the interest rate differential: the current or expected gap between New Zealand's rates and those set by the US Federal Reserve.

Economic Data: Implications for the New Zealand Dollar

New Zealand's macroeconomic releases help investors assess the economy and can alter the valuation of the New Zealand Dollar (NZD). Robust growth, low unemployment and strong confidence support the currency. Rapid 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 readings, in contrast, are likely to lead to NZD depreciation.

Risk Sentiment: Support and Pressure for the New Zealand Dollar

During risk-on trading, the New Zealand Dollar (NZD) generally appreciates as investors see limited risks across markets and take an optimistic view of growth. This environment typically improves the outlook for commodities and so-called ‘commodity currencies’, including the Kiwi. Market turbulence or economic uncertainty usually has the opposite effect: investors sell higher-risk assets in favour of more stable safe havens, tending to weaken NZD.