NZD/USD Could Breakout on Kiwi Strength

NZD/USD is modestly firmer in early trading on Wednesday, as the new Zealand dollar probes tentatively higher against the greenback.

The Kiwiis up 0.06 percent vs the US dollar as it continues to perform well against its US counterpart. At the current price of 0.6288, the Kiwi is up almost 4.5 percent from the mid-July low. However, the NZ dollar has more work ahead to narrow the dollar’s lead this year. Despite recent weakness, the US dollar to NZ dollar exchange rate is down around 8 percent year-to-date.

Both the Federal Open Market Committee (FOMC) and the Reserve Bank of New Zealand (RBNZ) are raising interest rates to fight inflation. At the most recent policy meeting the FOMC hiked by 75 bp, lifting rates into the 2.25 -2.50 percent range. Similarly, the RBNZ lifted the Official cash Rate (OCR) by 50 basis points to 2.50 percent.

Following a report from the RBNZ stating inflation expectations are cooling, analysts at TD securities had this to say:

“The outcome provides some relief but does little to alter the bigger picture – short-term inflation expectations (2y) remain well above the 1-3% target band, Q2 headline CPI, and non-tradeable inflation handily exceeded the RBNZ’s May MPS forecasts while core inflation measures are edging higher. Along with accelerating wages growth, the data suggest that the RBNZ’s job is still not done and look for a 4th straight 50bps hike at the upcoming Aug meeting”.

With the fed expected to raise rates by 75bp at the coming meeting, all eyes will be on today’s US inflation data.

US Consumer Inflation Numbers

Later today, the US Consumer Price Index (CPI) data will reveal if inflation is cooling. The CPI is forecast to show the rate of inflation fell to 0.5 percent from 0.7 percent in June. While annual inflation is expected to fall from 9.1 percent to 8.7 percent.

In light of the strong US Non-Farm Payrolls (NFP) report from last week, the US dollar may strengthen significantly if inflation is higher-than-anticipated. The US economy added 528,000 new jobs in July, exceeding the consensus analyst projection of 250k. As a result, a stronger CPI gives the FOMC more room to combat inflation. In this event, we expect the US dollar to the New Zealand dollar exchange rate to decline.

On the other hand, if inflation is lower than expected, the NZD/USD could extend recent gains. If this is confirmed, the NZD/USD could break out of its two-month downtrend.

Key Resistance Level

The Kiwi’s gains are currently capped by a descending trend line at 0.6310. If the pair breaks through the trend resistance, it should move towards the 100-Day Moving Average (DMA) at 0.6440. (blue line)

Although a drop below the 50-day moving average of 0.6271 (green line) would indicate that the US dollar might return to the 2-year high set in July.

NZD/USD Price Chart

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