NZD/USD supported by inflation data, but political uncertainty still weighs on kiwi
Macroeconomic overview:
- New Zealand's inflation rate jumped in the third quarter to overtake central bank forecasts, but was unlikely to alter the bank's determination to keep rates on hold for years.
- The consumer price index picked up 0.5% in the three months to the end of September, after a flat reading for the previous quarter.
- The CPI grew 1.9% on an annual basis, driven by housing and food costs and beating market expectations for a 1.8% rise. The reading was also well above the 1.6% predicted in August by the Reserve Bank of New Zealand.
- The third quarter gains in price growth were led by housing related costs, with rents rising an annual 2.2%. New Zealand's booming population, stoked by record net migration, has created strong demand for housing in the past few years, though house prices themselves have eased this year as central bank restrictions on lending took effect.
- Food bills rose 1.1% on strong global prices for soft commodities, while new government charges pushed non-tradables inflation, excluding housing, to a three year high of 2.2%.
- New Zealand's previously robust economic growth slowed in recent quarters as skill shortages led to capacity constraints and red-hot house prices cooled.
- Added to that was intense uncertainty about the direction of the country's next government after an inconclusive election last month left a small, nationalist party holding the balance of power. New Zealand acting Prime Minister Bill English on Monday said it could take until the end of the week to confirm the next government.
- The country has been in political limbo since September 23 when neither the National Party, which has led the government since 2008, or the Labour Party scored enough seats to form a government. National won 56 seats at the September election, meaning it would only need NZ First's nine seats to have a majority in parliament. Labour, with 46 seats, will have to go into coalition with both the Greens and NZ First to be able to govern. The NZ First has held negotiations with both over the past week, but has kept the country guessing over which way it was leaning.
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Technical analysis and trading signals:
- The NZD/USD recovered slightly in recent days, but the 7-day exponential moving average remains below 14-day ema and the bullish momentum is fading. The political uncertainty weighs on the market. We think that the NZD will rally if National Party forms a new government, but there is also a risk of stronger downside move if Labour Party, Greens and NZ First come into power.
- We stay sideways on this pair as we want to wait for a new government to be able to trade in line with macroeconomic fundamentals with political risk off the table.
Source: GrowthAces.com - your daily forex trading strategies