NZD/USD wavers below 0.5750 despite hot NZ inflation, China data

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The New Zealand Dollar remains trapped within a narrow range below 0.5750.
New Zealand CPI accelerated to a 3% year-to-year pace in Q3, but the positive impact on the NZD has been short-lived.
Strong China's GDP, Industrial Production, and Retail Sales have provided additional support to the Kiwi.

The New Zealand Dollar’s recovery attempt seen after the release of hotter New Zealand inflation figures and upbeat Chinese data has been limited below 0.5750, and the pair trimmed gains shortly afterwards, returning to 0.5725 during Monday’s European session.

Price pressures accelerated to a 3% year-on-year rate in New Zealand in the third quarter, their highest level in 15 months, from 2.7% in Q2. Quarter-on-quarter, the CPI increased 1%, twice the 0.5% growth seen in the previous quarter. Stats New Zealand pointed to the 11.3% increase in electric energy prices to explain the hotter inflation levels, although higher rents and food prices also contributed to the final reading.

Strong inflation, weak growth, complicates RBNZ's work

These figures might pose a headache to the Reserve Bank of New Zealand (RBNZ), which cut rates by 50 basis points against expectations earlier in October amd hinted at further easing in an effort to boost an ailing economic growth. This is the main reason keeping the pair from appreciating further on Monday.

Furthermore, data from China revealed that the Gross Domestic Product increased beyond expectations in the third quarter, with Industrial Production and Retail Sales showing resilience. China is New Zealand’s major trading partner, and these figures have provided additional support to the Kiwi.

Beyond that, signs of de-escalating tensions between the US and China have improved market sentiment, weighing on the safe-haven Dollar. Investors, however, maintain a cautious tone, and the US Dollar’s downside attempts remain limited so far.

Inflation FAQs

What is inflation?

Inflation measures the rise in the price of a representative basket of goods and services. Headline inflation is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core inflation excludes more volatile elements such as food and fuel which can fluctuate because of geopolitical and seasonal factors. Core inflation is the figure economists focus on and is the level targeted by central banks, which are mandated to keep inflation at a manageable level, usually around 2%.

What is the Consumer Price Index (CPI)?

The Consumer Price Index (CPI) measures the change in prices of a basket of goods and services over a period of time. It is usually expressed as a percentage change on a month-on-month (MoM) and year-on-year (YoY) basis. Core CPI is the figure targeted by central banks as it excludes volatile food and fuel inputs. When Core CPI rises above 2% it usually results in higher interest rates and vice versa when it falls below 2%. Since higher interest rates are positive for a currency, higher inflation usually results in a stronger currency. The opposite is true when inflation falls.

What is the impact of inflation on foreign exchange?

Although it may seem counter-intuitive, high inflation in a country pushes up the value of its currency and vice versa for lower inflation. This is because the central bank will normally raise interest rates to combat the higher inflation, which attract more global capital inflows from investors looking for a lucrative place to park their money.

How does inflation influence the price of Gold?

Formerly, Gold was the asset investors turned to in times of high inflation because it preserved its value, and whilst investors will often still buy Gold for its safe-haven properties in times of extreme market turmoil, this is not the case most of the time. This is because when inflation is high, central banks will put up interest rates to combat it. Higher interest rates are negative for Gold because they increase the opportunity-cost of holding Gold vis-a-vis an interest-bearing asset or placing the money in a cash deposit account. On the flipside, lower inflation tends to be positive for Gold as it brings interest rates down, making the bright metal a more viable investment alternative.