Stronger Than Expected NZ 3Q Inflation
The release of 3Q Inflation data for New Zealand surprised markets last night with a stronger than expected print of 0.2% QoQ vs. 0% expected. Rate cut expectations continued to build ahead of the meeting with rates markets pricing around an 85% chance of the RBNZ easing at their next meeting.
Reduced petrol prices and lower vehicle registration fees were the main drags whilst housing related costs continued to rise. Although most underlying inflation improved slightly, they broadly remain new the bottom of the RBNZ’s 1- 3% target range. Despite a bounce in NZDUSD in response to the data, it is worth noting that the data is in fact in line with the RBNZ’s own forecast and as such, a further rate cut in November can still be expected in line with Assistant Governor McDermott’s recent commentary.
Concerns Remain For RBNZ
New Zealand inflation remains dogged by lower petrol prices and the effects of a stronger NZD on elements such as international airfare and package holidays. Whilst inflation is still at subdued levels this latest data supports the idea that inflation bottomed out in H2 2015 and is now gradually recovering. Indeed, the YoY headline inflation rate is expected to move back over 1% in the coming quarters as prior Oil weakness drops out of the annual calculation.
However, a stronger NZD will continue to weigh on tradeable inflation and the primary risk for the RBNZ is that the protracted period of low inflation will further subdue inflation expectations, making the near 2% medium-term inflation target harder to achieve in a sustained manner. This was the key driver behind the RBNZ’s two prior cuts this year and remains a solid case for further easing this year.
For now, NZDUSD continues to remain within the broad bullish channel which has framed price action this year. The retracement lower over the last few weeks has found support into a rising bullish trend line, and prices are once again turning higher. This current rally will be closely watched by traders as it approached the .73 level which could potentially form the right shoulder of a larger head and shoulders pattern.
RBA Squash Easing Expectations
The RBA meeting minutes released overnight highlighted the bank’s concern for the housing and labour markets whilst also pointing to the significance of the next inflation report. The minutes noted that updated forecasts would be available at the next meeting where the bank is to consider the economic outlook as well as assess past rate cuts. The bank will also review labour and housing market conditions at the next meeting. Referring to the housing and labour markets, the note that there remains considerable uncertainty in both.
The bank did, however, note that they see reasonable prospect of sustaining growth. And growing jobs with Australia’s terms of trade forecast to rise again in 3Q. LNG ramp up is expected to boost GDP but not lead to many new jobs whilst a rise in future consumption is expected to mainly depend on household income. The bank noted that it is important to assess the degree of labour force utilization accurately. China growth was deemed to have stabilized in recent months though the build-up of debt in the country remains a cause for concern.
The Australian Dollar moved higher in response to comments which noted that the RBA sees AUD at current levels as being suitable for the economy though again a higher AUD would be unwelcome. These comments regarding the suitability of current AUD pricing suggests that the bank is done easing, for now, they leave the door open for a potential move in Q1 or Q2 next year depending on how the inflation environment develops.
AUDUSD is currently challenging the resistance trend line of a contracting triangle pattern. A topside break here suggests a continuation of the broader bullish channel which has framed price action this year.