The New Zealand dollar is one of the out-performers at the start of the new week owing to domestic prices rising faster than expected.
- Oil price slump could limit NZD strength
- Dairy auction is on Tuesday - will it give further impetus to the NZD?
The pound to New Zealand dollar exchange rate (GBP/NZD) has fallen notably and is testing 2.0459 as the kiwi is bought in response to inflation data that confirms the Reserve Bank of New Zealand may have to shy away from cutting interest rates further.
The run higher in NZD will however be tested on Tuesday the 18th when the results of the latest Global Dairy Auction are announced.
In theory the Kiwi should be lower on Monday, in sympathy with its commodity dollar brethren, the AUD and CAD.
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The two bigger cousins are under notable pressure owing to a slump in global crude oil prices which stems from an inability by global oil producers to stem production levels at a conference in Doha over the weekend.
Crude Oil prices immediately reacted lower, down 7% at one point.
“Our technical bias is for a deeper pullback in the short term, before stability is seen as we do believe major longer term lows were set in January,” says Robin Wilkin at Lloyds Bank in response to the topic that is likely to drive the commodity dollar’s over coming sessions.
There is a chance that this dynamic could limit any further NZD upside going forward.
New Zealand Inflation Higher - What Does it Mean for the NZD Outlook?
The New Zealand dollar has found a bid owing to news inflation for the first quarter of 2016 read at 0.2%, an improvement on the previous reading of -0.5%. It was also ahead of market forecasts for 0.1%. Just a glance at these figures would suggest perhaps inflation has found a floor.
The reason inflation matters for the NZ dollar is because it has a bearing on interest rate decision making at the RBNZ.
The RBNZ is tasked with keeping inflation between 1-3%, and this is largely achieved by lowering and raising interest rates. Generally speaking lowering interest rates promotes inflation as it increases the amount of money circulating within the economy.
A side effect of lower rates is a lower New Zealand dollar as foreigners are theoretically less inclined to send money to New Zealand to take advantage of better yields.
Today’s data leaves the case for an April rate cut at the RBNZ in the balance as it appears the inflation rate is already headed back to target.
Market pricing has responded to today’s CPI report by very slightly reducing the odds of such from slightly above, to slightly below, 30%.
So markets are still not quite convinced.
“We see the Q1 CPI as no cause to tilt away from our base view either – of a 25 basis point cut occurring at the 28 April OCR Review (and another cut in June,” says Craig Ebert at BNZ.
Ebert does not believe today’s CPI data will ensure that annual CPI inflation will return to the middle of the RBNZ’s target range by 2017.
Therefore, the further easing that the Bank signalled in its 10 March Monetary Policy Statement (MPS) still seems very much in play in Ebert’s opinion.
“We attribute the odds of an April cut at 55%,” says Ebert.
Dairy Auction Ahead, Likely to be Unsupportive of NZD
The next big test for the New Zealand dollar comes with the next Global Dairy Trade auction due on the 19th of April.
Markets will be looking to see how New Zealand’s key export is faring on the international markets.
On the 5th of April the NZD caught a bid as it was revealed dairy prices were recovering following an increase of 2.1%.
This is up from the -2.9% decline at the 15th March auction.
We are however still seeing prices at historical lows at just above the 600 level on Fonterra’s price index which equates to $2188 MT/FAS.
BNZ’s Ebert is not confident of a major recovery in prices:
“Yes, global commodity prices continue grapple up off their early-2016 lows, especially in oil. However, we don’t think dairy prices will catch much, if any, of this updraft.”
And whatever the GDT price outcome is for this auction, it will face stiff opposition from the NZD, which is also grappling its way back up.
“The net result might struggle to be a positive for Fonterra’s milk price forecast,” says Ebert.