New Zealand Dollar slide faces RBNZ inflation expectations test

Three consecutive declines leave NZD/USD close to its 6 November low.
2.75% remains the RBNZ's policy rate, with markets fully pricing in a December Fed hike.
Tuesday brings the RBNZ's quarterly survey of inflation expectations.

NZD/USD is trading near 0.5550. Three consecutive declines have returned the Kiwi to levels close to its lowest in more than 18 months, after Monday's post-election rebound lasted just one session. Thursday's trough was marginally below the current level. The pair now sits below the starting point of Monday's bounce and only a short distance above its 6 November low.

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

A 9 December rate increase is fully priced into futures after San Francisco Fed President Daly said on Thursday that further tightening would be necessary. She gave no indication of its scale or timing. On 28 October, the Reserve Bank of New Zealand (RBNZ) left its Official Cash Rate (OCR) unchanged at 2.75%. With US rates at 3.75%-4.00%, another Fed increase would extend an interest rate gap already at least a full percentage point wide.

National, ACT and New Zealand First have secured 67 of 131 seats in preliminary results from New Zealand's 7 November election, one seat above a majority. Nearly 400K votes remain uncounted until 27 November. With unemployment at 5.7%, Labour's proposal to restore employment to the RBNZ's mandate points towards lower interest rates for the Kiwi. Meanwhile, the Business NZ manufacturing index eased to 54.9 in October from 56.5, reducing pressure on the RBNZ to match the Fed's tightening.

2.34% inflation expectations: key releases ahead

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, previously at 2.34%, is due at 02:00 GMT on Tuesday, 17 November. The survey will inform the RBNZ's next interest rate decision.

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

0.5500-0.5550: NZD/USD's chart low

Four of the past five sessions have ended lower for the pair. Since August, successive rebounds have formed lower peaks: slightly below 0.6000 on 21 August, around 0.5700 in late October and 0.5650 on 10 November. Within the 0.5500 to 0.5550 range, the 6 November trough marks the lowest level on the daily chart, which begins in late June.

Daily price chart: NZD/USD

New Zealand Dollar: frequently asked questions

Which factors are most important for the New Zealand Dollar?

Widely traded by investors, the New Zealand Dollar (NZD) is also called the Kiwi. New Zealand's economic health and central bank policy broadly underpin its value, although several country-specific influences also affect its movements. As China is New Zealand's largest trading partner, developments in the Chinese economy tend to influence the Kiwi. Negative Chinese economic news is likely to signal reduced demand for New Zealand's exports, weighing on both the economy and its currency. Dairy prices are another important driver because dairy products are New Zealand's leading export. Higher prices lift export earnings, supporting the economy and, in turn, the NZD.

What do RBNZ policy decisions mean for the New Zealand Dollar?

Keeping inflation within 1% to 3% over the medium term, and close to the 2% midpoint, is the Reserve Bank of New Zealand's (RBNZ) objective. The bank sets interest rates at a level appropriate to that goal. If inflation becomes too high, it raises rates to slow economic activity. Higher rates also lift bond yields, making investment in New Zealand more attractive and supporting the NZD. Rate cuts, by contrast, generally weigh on the currency. NZD/USD can also be strongly influenced by the interest rate differential: the gap between current or expected New Zealand rates and those set by the US Federal Reserve.

Why do economic releases matter for the New Zealand Dollar?

New Zealand's macroeconomic releases provide essential evidence of the economy's condition and can affect the valuation of the New Zealand Dollar (NZD). Robust growth, low unemployment and strong confidence support the currency. Rapid economic expansion draws foreign investment and, when accompanied by elevated inflation, may prompt the Reserve Bank of New Zealand to raise interest rates. Weak economic figures, in contrast, are likely to push the NZD lower.

Why does global risk appetite affect the New Zealand Dollar?

During risk-on trading, the New Zealand Dollar (NZD) generally gains as investors see limited risk across markets and take an optimistic view of growth. Such conditions tend to improve the outlook for commodities and so-called ‘commodity currencies’ including the Kiwi. Market turmoil or economic uncertainty usually has the opposite effect: investors sell riskier assets and move into more stable safe havens, tending to weaken the NZD.