Inflation data and Fed Testimony to set direction for Kiwi

Domestic inflation data and Fed Testimony to set direction for the Kiwi.

By Garry Dean (Sales Trader, CMC Markets New Zealand)

The kiwi has proven resilient over the past week, and continues to find solid support just beneath 0.8800 ahead of Wednesday’s inflation data. The market is forecasting the Q2 CPI number to print at +0.4%, giving an annualised reading of 1.8% - a reading which would likely seal an additional 25 pt OCR increase from the RBNZ later this month. With the majority of the market looking for a July rate hike, followed by another later this year, the risk for the Kiwi is clearly a weaker CPI read which forces the RBNZ to pause. Governor Wheeler will be encouraged by REINZ numbers released yesterday showing a sharp 4% decline in Auckland house prices last month, with sales volumes dropping 12.3% nationally on the month.

Tuesday night sees the result of the latest GlobalDairyTrade auction, which will again be viewed closely. With falls recorded in 9 of the past 10 auctions, and dairy prices down 34% in NZ Dollar terms this year, it looks increasingly likely that Fonterra will be revising their $7.00 starting point for the 2015 season to somewhere closer to $6.40. With exporter commodity prices declining, and the TWI posting a post-float high of 81.97 just yesterday, the pressure is clearly building on the export sector. The longer this pressure builds, the greater the risk that the next move lower in the Kiwi will be a sharp descent, as opposed to an orderly correction.

The release last week of the Minutes from the June FOMC meeting suggested the FED are comfortable to leave rates lower for a “considerable time” after QE tapering ends in October. Since the June meeting we have seen a strong payrolls number, with US unemployment dropping to 6.1%, encouraging some market participants to suggest the FED may consider adjusting policy settings going forward. If the Fed were to adjust policy settings on the back of improving economic data we could see a strengthening of the US Dollar, and a subsequent fall in the Kiwi. A clearer picture will emerge when Fed Chair Janet Yellen delivers her semi-annual testimony to the Senate Banking Committee tonight.

Yellen has recently been prepared to look through signs of increasing inflation pressures, a view recently endorsed by Fed member Kocherlakota. There are, however, a number of Fed members expressing concerns that inflation is nearing the Fed’s 2% inflation target. Concerns that continued accommodation may see the Fed lose control of inflation, and risk destabilising financial markets if they are forced to hike rates faster and higher than they wanted to were expressed by Fed member Plosser on Friday.

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