NZD/USD Steady Amid Soft CPI Data

The NZD/USD pair is holding stable around 0.5705 during Thursday’s early trading in Asia. The New Zealand Dollar has lost some ground against the US Dollar following the release of weaker-than-anticipated Consumer Price Index (CPI) inflation figures. Investors are also awaiting the jobless claims report from the US, which is set to come out later today.

On Thursday, Statistics New Zealand published data revealing that the country’s CPI inflation dropped to 3.7% year-over-year in the third quarter (Q3), down from 4.1% in the previous quarter. This result was below the expected 3.8%. On a quarterly basis, CPI increased by 0.7% in Q3, slower than the 1.5% rise seen in Q2 and also under the anticipated 0.8% gain.

The Kiwi reacted slightly negatively to the softened CPI data. Still, the inflation rate is above the higher end of the Reserve Bank of New Zealand’s (RBNZ) target range, which keeps expectations alive for a potential rate hike next week.

Currently, market expectations are favoring almost a 98% chance of a rate hike from the RBNZ next week, with a 100% probability of 50 basis points (bps) in hikes by the end of February, according to reports.

On the US side, traders are contemplating the Federal Reserve’s (Fed) future interest rate strategy ahead of their policy meeting next week. Recently, Fed Chair Kevin Warsh didn’t provide any hints on whether additional rate increases are on the horizon or when they might occur.

“There’s really no dominant theme for the markets right now… and I think that’s likely to continue at least until next week’s FOMC meeting,” remarked Shaun Osborne, chief FX strategist at Scotiabank. “We really need to get an idea of the Fed’s perspective.”

Kiwi Remains Underpriced Amid RBNZ’s Hawkish Outlook

Analysts at ING have noted that there’s a growing consensus in the markets for tighter policies, with investors pricing in around 18 to 21 basis points for the coming week’s meeting since RBNZ Chief Economist Paul Conway made hawkish comments last week. They emphasize that Conway stated the decision for the upcoming meeting is still open and pointed out worries regarding the weak NZD and potential upside risks for the CPI in Q4. ING interprets this communication as a bid to push market pricing higher. They predict a 25 bps hike for next week unless there’s a significant unexpected reduction in CPI.

On the currency front, ING emphasizes that the NZD is undervalued compared to its short-term fair value model, and they expect it to regain strength against the Australian Dollar. Their baseline forecast indicates NZD/USD will trade above 0.570 by year-end, driven by hawkish rhetoric from the RBNZ and the current undervaluation.

Warsh Cautions on Investments and AI Risks as Fed Keeps Options Open

Fed Chair Warsh delivered a cautiously optimistic message, reflecting a 5.6/10 score on the FXS Speechtracker, which is a tad lower than the historical average of 6.1. His acknowledgment of being “over-scarred from the global financial crisis” indicates a recurring hesitation toward potential downside and financial stability risks, even as he points to robust growth and investments spurred by “good policies.” His emphasis on not jumping to conclusions regarding the October and December meetings, along with comments about the impact of AI on demand and uncertainty around near-term employment effects, suggests a careful stance rather than an immediate hawkish signal for the Dollar.

The FXS Fed Sentiment Index remained unchanged at a strongly hawkish 127.51, signifying that Warsh’s speech did not significantly alter the perceived policy trajectory despite the slightly softer Speechtracker score. With the index well above the 100 mark, markets still perceive the Fed as leaning towards a hawkish bias. However, Warsh’s focus on solid data regarding output, employment, inflation, and tail risks suggests a more nuanced approach rather than a definitive shift in a Dollar-bullish stance.

Technical Analysis: NZD/USD Displays Negative Tone Below 100-Day SMA

According to the daily chart, the NZD/USD is trading above the mid-line of the Bollinger Bands and considerably above the lower band, indicating a potential base within the recent range. However, it remains below the 100-day Simple Moving Average (SMA), which limits broader recovery prospects. The Relative Strength Index (14) has improved to about 56, suggesting enhancing bullish momentum, though not yet strongly decisive, as the price oscillates between band support and the overlying trend barrier.

On the upside, the 100-day SMA at 0.5775 serves as the initial significant resistance level; a close above this point could pave the way for a more substantial rebound. Conversely, initial support can be found around the upper Bollinger Band area at approximately 0.5705, followed by the mid-band near 0.5635. A drop below the lower band, around 0.5565, might expose the pair to a deeper decline within the current range.