fxmatters

Last week the local focus was on recession. The NZD declined against most currencies with the notable exception of the US dollar (NZD/USD +0.3%). This week the attention will be on inflation (Calendar). Local inflation is undoubtedly high – the issues for markets is it any higher than the RBNZ’s 3.8% estimate, and will it deter the RBNZ from easing next week (Central Bank Watch)? The market is coming around to thinking that the RBNZ will ease anyway (Interest Rate Futures).

I think they have this wrong. The RBNZ has being fighting for over 3 years now to bring inflation back under control and yet the NZIER survey last week showed firms’ pricing intentions to be the highest in over 20 years. The NZD is likely to bounce a little this week and next as the market comes to see that the RBNZ cannot ease just yet.

Meanwhile the US housing situation continues to look bad and should outweigh any inflation concerns in the US, keeping the downward pressure on the USD.

The short of it all: the NZD/USD has not broken out of its 74.5-77.0 trading range yet and will probably push back towards the top of the range near-term. Any rallies should present good selling opportunities longer-term, though, as the slow local economy will come to hurt those who cannot see any other way than raising prices.