New Zealand Dollar: Will Higher Inflation Boost the Kiwi?

Daily Forex Fundamentals | Written by DailyFX | Oct 18 08 08:01 GMT |

Trading the News: New Zealand Consumer Prices What's Expected Time of release: 10/20/2008 21:45 GMT, 17:45 EST Primary Pair Impact : NZDUSD Expected: 1.6% Previous: 1.6% Impact of the New Zealand Consumer Prices on NZDUSD over the last 3 months 2Q 2008New Zealand Consumer Prices The consumer price index for New Zealand surged 1.6% in the second quarter on the back of rising food and energy costs, highlighting the fastest rate of inflation in 18 years. In addition, prices pressures increased 4.0% from a year earlier, which could lead the RBNZ to hold a hawkish outlook despite the downturn in the $104B economy. Meanwhile, market participants have already raised concerns that the economy may face a period of stagflation as economic growth contracted in the first quarter despite mounting price pressures, and has certainly left RNBZ Governor Alan Bollard in a complex situation. However, Dr. Bollard expects the slowdown in the economy to bring inflation back within the bank's 3% limit in 2010, and stated that he is likely to lower the benchmark rate this year as New Zealand teeters on the brink of a recession. 1Q 2008New Zealand Consumer Prices Consumer prices in New Zealand rose 0.7% in the first quarter of 2008 on higher food and fuel prices. Although, the quarterly rate of price appreciation was lower than the prior quarter the annualized rate printed at 3.4% exceeding the prior quarter's 3.2%. The increase in inflation from the reduced the chances of a RBNZ rate cut at the central bank's next policy meeting. The country's benchmark rate at an all-time high of 8.25% has begun to weigh on growth. The expected global slowdown has heightened fears that the economy may cool faster than expected and into a recession. The mixed inflation data would leave traders confused and the resulting price volatility would have left us on the sideline. 4Q 2007New Zealand Consumer Prices New Zealand inflation rose 1.2% for the last three month's of 2007. The increase exceeded expectations of 1.0% and pushed the yearly level to 3.2%, above the RBNZ's target band of 1-3%. Rising costs in food and fuel made the biggest contributions to the headline number. However, there was an unexpected easing of the stripped down non-tradable measure to 0.7%. The lower core reading was welcomed news to Governor Bollard, as his recent rate hikes may be starting to cool the economy. Although we didn't trade this release, the bullish reading and the subsequent price volatility may have triggered a long trade. However, the lack of follow through would have resulted in a 50 point loss. How To Trade This Event Risk Consumer prices in New Zealand are anticipated to rise another 1.6% in the third quarter amid the recent pullback in commodity prices. In addition, the annual rate of inflation is widely expected to reach 5.1% from 4.0% in the previous quarter, which is greater than the 4.9% forecast projected by the RBNZ. Despite mounting price pressures, the downturn in the housing sector paired with slowing demands from the global economy has pushed the economy into a recession for the first time since 1998, which led Governor Alan Bollard to lower the benchmark interest rate for the first time in five years as he expects slowing growth to drag inflation back within the bank's 3% limit over the next two years. As the RBNZ is scheduled to meet next Wednesday, price action for the given event risk could be muted as market participants forecast the central bank to cut another 100bp to lower the key interest rate to 6.50% from 7.50%. However, as rising price pressures continues to pose a threat to the economy in the near-term, Governor Alan Bollard may hold back from delivering a 1% reduction as risks of a stagflation remains. Moreover, lowered interest rate expectations paired with mounting concerns for the $104B economy could weaken the New Zealand dollar further as investors continue to limit their risk appetite. Despite expectations for a rate cut by the RBNZ, the minor recovery in stock prices has spurred price action for the Kiwi, and pushed the currency higher against the U.S. dollar this week. Therefore, a uptick in inflation paired with a rise in the stock market could favor a bullish outlook for the New Zealand dollar in the near-term. As a result, an annual reading of 5.1% or higher would support a long NZDUSD trade, and we will look for a green, five-minute to confirm entry on two lots of the kiwi-dollar. Our initial stop will be placed at the nearby swing low (or reasonable distance), and this risk will determine our first target. Our second target will be based purely on discretion, and in order to preserve our profits, we will move the stop on the second lot to breakeven once the first trade reaches it target. Conversely, if the CPI release fails to meet expectations, there will be a greater chance that the central bank will in fact deliver a 100bp cut, which would only fuel bearish sentiment for the NZDUSD. Accordingly, we will follow the same strategy for a short trade as the long position mention above, just in reverse. DailyFX Disclaimer Investment in the currency exchange is highly speculative and should only be done with risk capital. Prices rise and fall and past performance is no assurance of future performance. This website is an information site only. Accordingly we make no warranties or guarantees in respect of the content. 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