New Zealand Dollar: Limited support against USD from RBNZ rate hikes - BBH

NZD/USD’s rebound has run out of momentum after hitting a one-month high, according to Elias Haddad of Brown Brothers Harriman (BBH). New Zealand’s Q3 Consumer Price Index (CPI) fell short of expectations, although underlying inflation continues to show persistent price pressures. While above-target inflation and elevated Oil prices strengthen the case for additional Reserve Bank of New Zealand (RBNZ) tightening, Haddad argues that continued Fed tightening leaves less room for policy convergence, limiting further NZD/USD gains.

Why are NZD/USD gains limited despite RBNZ tightening?

"NZD/USD recovery lost steam after testing a one month high at 0.5710. New Zealand Q3 CPI undershot expectations. Headline CPI increased 0.7% q/q vs. 1.5% in Q2, below the 0.8% rise forecast by consensus and RBNZ."

"Despite the softer headline reading, underlying inflation points to persistent price pressure. 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. Meanwhile, CPI ex. petrol remained at 3.2% y/y for a fourth consecutive quarter."

"Above target inflation and still elevated oil prices argue for additional RBNZ rate hikes. 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%. Nonetheless, NZD/USD upside is constrained because Fed tightening curbs the scope for policy convergence."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)