Surge in NZ Inflation

After five years running below, inflation in New Zealand has finally returned to the bank’s 2% target. The latest data shows that CPI rose 2.2% YoY in Q1 showing a marked increase from its standing at 0.4% just six months ago and also the first +2% reading since the second half of 2013. A large portion of the rise has been fuelled by higher petrol and food prices. Broader inflationary pressures are also rising, however, the key thing now will be whether this reading proves to be the peak for 2017.

Data Breakdown

• Headline CPI increased 1% QoQ with the YoY figure surging from 1.3% to 2.2%
• Tradable inflation was 0.8% QoQ with the annual rate jumping from -0.1% to 1.6%
• Non-tradable inflation rose 1% QoQ and 2.5% YoY
• CPI excluding petrol increased by 1.7% YoY while CPI excluding food and energy remained unchanged at 1.6% YoY

RBNZ Outlook

With inflation having surged back over the RBNZ’s 2% target, many are now questioning whether this will lead to a hawkish shift for the central bank. The key element here is the extent to which this rise is linked to the rise in petrol prices which has proven temporary and could even see inflation fall back from here. The RBNZ has maintained a broadly neutral tone at recent meetings noting that they expect inflation to gradually reach the middle of the target band, reflecting strength in the domestic economy, but also commenting on the strength of the NZD exchange rate which they note needs to decline.

Technical Perspective

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The technical picture for NZDUSD remains weighted to the downside for now with price leaning on the .6880s support region which has held three times over the last few months. Price action has moved within a contracting triangle over the last year, reflecting the loss of momentum in the market as RBNZ easing expectations weakened and the Fed failed to deliver the hawkishness that many were expecting at the turn of the year.  A break of the .6880s support should signal further downside for the pair with the May 2016 low the next key support level on watch.

RBA Minutes Release

This week also saw the release of the RBA minutes from the April meeting which highlighted the bank’s concern with weakened labour market conditions as well as the persistent increase in house prices. The RBA noted previously that the labour market had “softened” which reflected an increase in concern from prior months when the conditions were described as” mixed”.

RBA tightening expectations have receded over recent weeks as AUD has come under pressure from the collapse in iron ore prices, which are down around 30% since March 5^th. Restrictions on Chinese steel capacity as well as near record inventories of iron ore at Chinese ports have seen the metal cratering over the last month, pushing AUD lower.

Technical Perspective

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The Aussie has been moving in a large contracting triangle formation over the year pegged between support at the 7160 level and resistance at the .78 level. Price is currently holding in the upper end of the range with key local support at the .7469 level which is the April low. A break below this level opens up the way for a retest of the larger range low.