New Zealand Dollar Sinks

This week has gone from bad to worse for the New Zealand dollar, as NZD/USD takes yet another tumble on Thursday. In the North American session, NZD/USD is trading at 0.6248, down 0.74% on the day. The currency has dropped 2.66% this week and is trading at lows not seen since June 2020.

US Inflation Stays Hot

The US inflation report for April showed that CPI eased, but the decline was much smaller than expected. US CPI dropped from 8.5% to 8.3%, above the estimate of 8.1%. This chilled any speculation of an inflation peak, as the markets digested the fact that even if inflation is moving lower, it could do so at a very slow pace.

For the Fed, the high inflation reading confirms that its hawkish stance is justified, but now there are calls for policymakers to be even more aggressive in tightening the monetary screws. The Fed has signaled that it plans to deliver 50-bps increases in June and July, but the markets aren’t dismissing the possibility of a massive 75-bps hike. Fed member James Bullard said on Wednesday that 50-bps moves were his base case, and this appears to be the majority view.

Still, inflation was higher than investors, or the Fed had expected, and the May inflation report, which will be released just a few days prior to the Fed’s next meeting on June 14-15th, will be critical in determining the size of the next rate hike. The Fed has embarked on a rate-hike cycle primarily because of soaring inflation, so it stands to reason that inflation will be a critical factor in rate policy. Fed member Mester said on Tuesday that she supports raising rates by 50-bps at the next two meetings and then speeding up or slowing down the pace of increases based on inflation levels.

The RBNZ is also under pressure to tighten more aggressively after Inflation Expectations for Q2 crept upwards to 3.29% (3.27% prior). Inflation Expectations have now risen for an eighth successive month, and the RBNZ is looking to reverse this trend. At the April meeting, the RBNZ said it would act to ensure that:

 “current high consumer price inflation does not become embedded into longer-term inflation expectations.” 

With Inflation Expectations not showing any signs of easing, the RBNZ is widely expected to raise rates by 50-bps at the May 25th meeting.

NZD/USD Technical

• NZD/USD is down sharply and has broken below support at 0.6281. Below, there is support at 0.6169
• There is resistance at 0.6344 and 0.6456

NZD/USD Daily Chart