New Zealand’s high inflation poised to add to kiwi’s downside risks

WELLINGTON: The New Zealand dollar’s attempts at a rally are proving futile ahead of a report that’s expected to show inflation easing further, setting up the currency to end the year lower.The kiwi rallied to a two-month high against the greenback last week before its subsequent fall after resistance around its 100-day moving average held.

That may leave the currency vulnerable to further declines as investors reassess the Reserve Bank of New Zealand’s (RBNZ) policy outlook.

Investors will also be monitoring any reaction in the kiwi after the opposition party’s election win over the weekend.

The nation’s third-quarter inflation probably eased to 5.9% from a year earlier, a tad slower than the 6% in the previous three months, according to a Bloomberg survey of economists ahead of data due out today.

Easing inflation may spur investors to dial back their expectations for another rate hike by the central bank.

This would casti more downward pressure on the kiwi.

“The New Zealand dollar risks remain skewed to the downside in our view,” said Carol Kong, a Sydney-based currency strategist at the Commonwealth Bank of Australia.

“The interest rate support for dollar has faded as we expect the RBNZ to keep the official cash rate unchanged until early 2025.”

The kept interest rates unchanged at its last meeting and said that it may need to remain restrictive for a longer period of time to return inflation to target.

The RBNZ’s Monetary Policy Committee held the official cash rate at 5.5%, as predicted by all 22 economists in a Bloomberg survey.

With investors pricing in around an 80% probability of another 25-basis-point interest rate hike from the RBNZ by April, there is plenty of room to unwind their hawkish bets, which would weigh on the kiwi, should the price gains slow.

Policymakers have held rates at the same level for the previous three meetings and said earlier this month that high rates are constraining economic activity.

“We don’t expect further tightening from the RBNZ,” said Mary Jo Vergara, an Auckland-based senior economist at Kiwi Bank Limited.

Instead, she favours a prolonged holding stance.

“Inflation is still high, but we see it continuing to decelerate. And there’s clear evidence that the labor market is loosening rapidly.”

A dialling back of investors’ hawkish RBNZ expectations is not the only thing threatening to push the New Zealand dollar lower.

“Falling commodity prices, narrowing interest rate differentials and weakening risk appetite are all working against the kiwi dollar,” said Vergara, who sees the currency ending the year at 55 US cents versus the dollar. It closed last week at 58.85 US cents.

Interest rate differentials were in play last week as hotter-than-expected inflation outside the United States sent bets of another hike by the Federal Reserve this year climbing.

That pushed the New Zealand dollar to its biggest fall since May on the back of US dollar strength.

Westpac Banking Corp forecasts the kiwi ending the year at 58 US cents versus the dollar based on the strong greenback trend resuming. — Bloomberg