Tuesday’s second-quarter inflation data will set the tone for the New Zealand dollar for the rest of the summer, say banks. With inflation risks skewed to the downside, a lower kiwi is more likely than not.
The New Zealand dollar has spent much of the year influenced by risk sentiment and, in the case of NZD/USD, by the broader market for US dollar pairs.
The kiwi has fallen steadily since April not only against the greenback ($0.677), but also to a lesser extent against the yen (¥75.99), Australian dollar (A$0.912) and Canadian dollar (C$0.891).
The kiwi’s trajectory will be changed for the better on Tuesday should quarter-on-quarter and yearly inflation prints comfortably beat the respective market forecasts of 0.5 percent and 1.6 percent (the RBNZ would like to see annual inflation closer to 2 percent); however, this remains unlikely according to the team at ANZ.
“Little [NZD] support should come from Q2 CPI where our economists see risks as skewed to the downside,” said ANZ’s latest market commentary.
“Indeed, the upcoming second-quarter inflation report will set the tone for how investors view domestic NZD dynamics over the coming months,” says ING’s weekly FX note. “In the absence of any positive NZD inflation surprises, the kiwi looks pretty vulnerable in the near term.”
Worse still, Credit Agricole believes that “only a large [upward] surprise will have any meaningful impact on the currency.” The French bank cites a near-zero probability that the RBNZ will hike interest rates this year as reason enough to stay on the sidelines even if inflation data is slightly better than forecast.
How far could the New Zealand dollar fall?
“Risks are that NZD/USD could test fresh lows over the coming months, opening up a potential move towards 0.65,” thinks ING.
Given ING’s concurrent belief that the Australian dollar continues to trade within the “low 70s” relative to the US dollar, this would imply NZD/AUD rates potentially as low as 0.885.
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