NZD hits 4-week high on hot inflation

The New Zealand dollar is drifting on Monday, after briefly breaking above the 71 level. Overnite, NZD/USD rose to 0.7105, its highest level since September 16. The currency climbed 2.07% last week, its best week since late August.

New Zealand inflation climbs to 10-year high

Inflation continues to rise in the major economies. The relaxation of health restrictions and the reopening of economies have led to an unleashing of pent-up demand as well as supply-chain disruptions. New Zealand reported that third-quarter inflation surged to 4.9% (YoY), up from 3.3% in Q2 and above the consensus of 4.2%. This was the highest inflation rate in 10 years. Consumer prices rose 2.2% (q/q), compared to 1.3% in Q2 and ahead of the forecast of 1.5%.

Major central banks such as the Fed, the ECB and the BoE have argued that the surge in inflation is a temporary phenomenon, but markets are becoming more sceptical of this stance as there are no signs that inflation will ease anytime soon. In New Zealand, inflation has exceeded the RBNZ 1-3% target band, and ASB Bank is projecting that inflation will top 5% by the end of the year. Inflation continues to rise despite the prolonged lockdown of Auckland, the country’s largest city, which has dampened economic growth.

The RBNZ has embarked on a series of rate hikes and raised rates by 0.25% earlier this month, with another 0.25% hike fully priced in for the November meeting. This may not be enough to contain inflation, and the market has priced in a 50% chance that the bank will raise rates by 50 basis points at next month’s meeting.

The US dollar index continues to range-trade and is currently at 0.9405, up 0.10% on the day. If the index has a daily close below 93.50, that could change the bullish sentiment towards the US dollar. Conversely, if the index breaks above resistance at 94.50, it has room to move higher.

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NZD/USD Technical

• NZD/USD faces resistance at 0.6855 and 0.6963
• There are support lines at 0.7128 and 0.7185

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