Third-quarter inflation slowdown weighs on New Zealand Dollar

Softer New Zealand inflation puts pressure on the Kiwi, leaving NZD/USD struggling to build on recent gains.
Lower US Treasury yields and US Dollar weakness cushion the pair's decline.
Next week's Fed and RBNZ decisions are in focus as traders seek fresh signals on monetary policy.

NZD/USD trades near 0.5686 at the time of writing. The pair has retreated from a one-month high of 0.5711 reached during Asian trading hours, with weaker-than-forecast domestic inflation interrupting its five-day advance on Thursday. Selling has failed to gather momentum, however, as falling US Treasury yields keep the US Dollar (USD) under pressure.

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

Below 5.00%, the benchmark 10-year US Treasury yield is down around 15 basis points (bps) on the day, having reached 5.36% earlier this month. Yields across the US Treasury curve are extending their retreat from multi-year highs as concerns about AI-related investments support demand for government bonds. The US Dollar Index (DXY) stands near 101.60 after hitting a three-week low of 101.45. The index measures the Greenback against a basket of six major currencies.

Although inflation risks remain skewed to the upside, the sell-off in AI-related equities could complicate the interest rate outlook for the Federal Reserve (Fed). Higher energy prices linked to Middle East tensions are a particular source of inflation risk.

At next week's Fed meeting, the US central bank is widely expected to keep interest rates on hold. Expectations for another increase in December have weakened, however. The CME FedWatch Tool now puts the probability at 67.6%, compared with around 89% earlier in the day.

A 0.7% QoQ rise in New Zealand's Consumer Price Index (CPI) marked a sharper-than-expected cooling of inflation in the third quarter. The reading was below the 0.8% forecast and the previous 1.5%. Annual inflation slowed from 4.1% to 3.7%, also undershooting market expectations of 3.8%.

Despite the weaker headline figure, Brown Brothers Harriman strategists say "underlying inflation points to persistent price pressure." They note that "the RBNZ sector factor model printed at 2.8% y/y for a second straight quarter, near the top of its 1-3% target range," adding that "CPI ex. petrol remained at 3.2% y/y for a fourth consecutive quarter."

BBH therefore maintains that "above target inflation and still elevated oil prices argue for additional RBNZ rate hikes." On market pricing, the strategists note that "the swaps curve price in 85% odds of a 25bps RBNZ rate hike to 3.00% on October 28 and more than 100bps of tightening over the next twelve months to 3.75% - near the upper end of the RBNZ’s estimated neutral range of 2.20%-4.10%." They nevertheless warn that "NZD/USD upside is constrained because Fed tightening curbs the scope for policy convergence."

Today's New Zealand Dollar Performance

Against the major currencies listed below, the New Zealand Dollar (NZD) recorded its strongest performance against the Australian Dollar today. The table presents its daily percentage changes against each currency.

	USD	EUR	GBP	JPY	CAD	AUD	NZD	CHF
USD		0.07%	-0.07%	-0.77%	-0.29%	0.08%	0.26%	-0.35%
EUR	-0.07%		-0.16%	-0.86%	-0.38%	0.02%	0.20%	-0.45%
GBP	0.07%	0.16%		-0.72%	-0.26%	0.15%	0.33%	-0.29%
JPY	0.77%	0.86%	0.72%		0.47%	0.85%	1.01%	0.42%
CAD	0.29%	0.38%	0.26%	-0.47%		0.38%	0.58%	-0.05%
AUD	-0.08%	-0.02%	-0.15%	-0.85%	-0.38%		0.16%	-0.43%
NZD	-0.26%	-0.20%	-0.33%	-1.01%	-0.58%	-0.16%		-0.58%
CHF	0.35%	0.45%	0.29%	-0.42%	0.05%	0.43%	0.58%

To read the heat map of percentage changes between major currencies, select the base currency in the left-hand column and the quote currency in the top row. For instance, choosing the New Zealand Dollar on the left and following that row across to the US Dollar gives the percentage change for NZD (base)/USD (quote) in the corresponding cell.