NZD Rallies On Small Inflation Improvement Despite Continued Weakness

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June CPI in New Zealand was a mixed bag, with both the quarter on quarter reading and year on year reading printing below expectations at 0.4% vs 05% expected and 1.5% vs 1.6% expected, respectively. While the figures are still low, inflation is showing positive trajectory with the annual figure having increased from 1.1% over the prior reading in March.

The lift in inflation over the second quarter was fuelled by food, alcohol and housing-related price increases. The biggest surprise in the data was the weakness in transport-related prices which were only 0.2% higher QoQ, well beneath the 1% expected. Fuel prices were firmer on the quarter driven by the rise in global oil prices over recent months as well as a weaker exchange rate, though discounting on used vehicles offset some of the increase in petrol costs.

In terms of the relevance of the data, there was little in this report to suggest that the RBNZ is likely to alter its policy stance any time soon with the market still looking at an RBNZ rate hike as around a year off. Notably, inflation is showing positive development, which means that focus on the September quarter will be even greater. This is especially true given that this quarter will see introduction of the Auckland fuel tax and should also consider further weakness in the exchange rate.

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Housing Prices Remain Biggest Driver

Housing related price increases remain the biggest driver of domestic inflation with both rent and construction costs having risen firmly over the quarter. For construction costs, the main rises were outside of Auckland, with South Island in particular seeing construction costs increase 1.6% following a 0.5% decline in the prior quarter. This adds further weight to the perspective that rising demand for housing is not just confined to Auckland. Alongside this, rent posted its strongest quarter since the end of 2015 rising 2.5% year on year.

Tradables inflation rose 0.3% over the quarter marking a rebound from two consecutive quarterly declines in imported inflation. Year on year, tradables inflation recovered 0.1% following the 0.4% decline seen over the prior quarter, helped mainly by higher food prices and stronger fuel costs. Data from StatsNZ shows that petrol prices rose 3.2% quarter on quarter with the largest increases coming in Wellington and South Island.

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Trimmed Mean Inflation Rises

StatsNZ measures the inflation data and provides a trimmed mean reading which essentially removes any extreme readings on either side. The trimmed mean in the June quarter was in the range of 1.7% – 1.8%, up from 1.3% – 1.7% in March and also above the 1.5% reading in the headline figure for June.

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Market Reaction

NZD has been on a steady decline against the US Dollar since March this year. Growing concerns over the impact of a Trump driven trade war has seen commodity prices falling which has weighed on risk sentiment and kept NZD pressured. It seems though, that for now the NZD is likely a bit overdone to the downside as, despite the weakness in data, NZD rallied. This was likely in response to the rise in inflation YoY compared with last quarter.  The market is eager for any positive news and it seems that this has been enough to provide some short-term relief for bulls.

forex nzd/usd

The declines over the last few months have seen price testing the .6780 – .6815 support zone which was the May 2017 and November 2017 low. After pricing the level two week ago, price has since but in a strong bullish reversal candle which highlights the potential for a further rotation higher. If price does continue lower however, the next key level to watch will be the long term rising trend line from 2009 lows. To the topside, the next key resistance will be a retest of the bearish trendline from 2017 highs.

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