The New Zealand dollar surged unexpectedly on Tuesday morning with NZD/USD hitting $0.6841, the highest level since July 7th. However, the day had badly start for the Kiwi as headline inflation, which was released a few hours earlier, came in below expectation, printing at 1.5%y/y, compared to forecast of 1.6% and 1.1% in the previous quarter. In the following hours, the release of the core gauge shed a completely different light on inflation development. The RBNZ’s sectoral factor model gauge increased 1.7%y/y in Q2 (1.6% in the previous quarter), while non-tradable inflation increased 2.5% (2.3% in the previous quarter).
It could be surprising to see a 0.85% appreciation of the Kiwi against the greenback as inflation is still within the 2%+/-1% target range. However, speculators are massively short NZD. Indeed, according to the latest Commitment of Traders (COT) report, speculators’ net-short positions represents more than 50% of total open interest. Given the fact that the upside surprise in core inflation could translate into a more hawkish tone from the RBNZ, speculators have started to take profit and reduce their short exposure. Given this extreme positioning, the unwinding of short positions should continue and would help the Kiwi recover some ground.
NZD/USD has been testing the 0.6673-0.6781 support area for the last two weeks. The closest resistance stands at 0.6859 (high July 9th), then the next one can be found at 0.6922 (high from June 25th). Given the sharp appreciation of the last few hours, a period of consolidation seems most likely. In the medium-term, we expect the Kiwi to continue grinding higher as speculators continue to unwind their short positions and the RBNZ starts shifting its tone.
By Arnaud Masset