NZD/USD plunged by 1.2% to 0.6097 after the Reserve Bank of New Zealand reverted to a dovish hold. Interest rate futures reduced the modest odds of a hike at the April meeting from 20% last Friday to 0% on Wednesday, sending the 2Y bond yield lower from 5% to 4.81% in a single day. Although the Committee noted that inflation was lower than expected in 4Q23, headline CPI and inflation expectations remained above 2% or the mid-point of its 1-3% target range. Even so, the Committee was relieved that both tradeable and non-tradeable inflation fell, especially the former, noting that aggregate demand was now better matched with supply capacity.
Hence, the Committee considered the monetary policy stance appropriate in restricting demand, agreeing to keep interest rates at a restrictive level for a sustained period to ensure inflation’s return to the target range. Based on the RBNZ’s projection for CPI inflation to return to the target range in the September 2024 quarter and the 2% target mid-point in 2025, interest rate futures now see the RBNZ lowering rates in June.
NZD/USD’s fall was limited to 0.6080, around its 100-day moving average and a trendline support level. With the RBNZ’s rate hike bias diminished, the kiwi is vulnerable to a stronger greenback on US data surprises today. Although consensus expects the US PCE core deflator to fall to 2.8% YoY in January from 2.9% in December, the Fed will be more concerned about the expected rise to 0.4% MoM from 0.2% for the comparable periods. If US initial jobless claims deliver another surprise fall, next week’s nonfarm payrolls could defy the consensus to fall below the 200k mark. During his semi-annual congressional testimonies on 6-7 March, Fed Chair Jerome Powell will seek to discourage markets from repricing excessive rate cuts amid a resilient US economy, which the Fed worries could stall or reverse the progress achieved so far to restore price stability.
Quote of the day
"Following the light of the sun, we left the Old World.”
Christopher Columbus
29 February in history
In 1504, Christopher Columbus used a lunar eclipse to frighten hostile Jamaican Indians.
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