The News Zealand dollar tumbled on Monday after a survey showed businesses expect inflation to move south soon. On-year inflation expectations slid to 1.77%y/y from 1.92% three months ago, while two-year ahead inflation expectations fell to 2.09%, down from 2.17% previous reading. As a result, the Kiwi dropped 0.45% against the US dollar to 0.7375, the lowest level since July 20th.
The sharp debasement of the New Zealand dollar of the last couple of days is mainly due to two points. First the last US jobs report - released on Friday - gave an upbeat assessment of the world’s largest economy and relaunched speculations about a more hawkish Federal Reserve. The probabilities of a rate hike in December - extracted from the Fed funds futures - jumped from 37.4% to almost 45%. This is not much but enough to give the greenback a slight boost.
Secondly, the decline in inflation expectations will likely pleased the Reserve Bank of New Zealand, which is expected to review its monetary policy next Wednesday (no change expected), in its fight against a strong Kiwi. The RBNZ will likely emphasize the risk to inflation of a strong NZD and add that a tighter monetary policy would just make things worse.
Finally, one could also mentioned the extreme in non-commercial positioning. Total net speculative Kiwi speculative position rose to 63.5% of total open interest (future only) last week, increasing the odds of a downside correction as an unwinding of long position is more than likely.
By Arnaud Masset