NZD/USD Has Typically Rallied Following Recent CPI Prints

Tomorrow's NZ Q4 CPI print shapes as a key one ahead of the February RBNZ meeting. Market expectations look for a down shift in q/q pressures to 1.3% (range of 0.9%-1.8%), from 2.2% in Q3. This would take the y/y pace to 7.1% from 7.2%. The market expects tradables q/q to be at 0.8%, from 2.2% in Q3, with a (range of 0.3% to 1.1%), while non-tradeables is forecast at 1.7% q/q, from 2.0% in Q3 (range of 1.4% to 2.0%).

• The general trend has been for upside inflation surprises over the past 18 months, see the first chart below.
• A sharp pull back in petrol prices is expected to weigh on headline momentum from Q4, although underlying inflation pressure trend (non-tradables/core) will still be watched closely in terms of the RBNZ outlook.
• Current market pricing (OIS) has the policy rate peaking close to 5.45% near the middle of the year, versus the current rate of 4.25%.

Fig 1: NZ Headline Inflation Versus Expectations

Source: MNI - Market News/Bloomberg

• The NZD/USD reaction post recent CPI prints has generally been positive, which is not surprising given the upside surprises. 2 weeks after the Q3 print in October last year, NZD/USD was 3.2% higher, in July (post the Q2 print), we were 2.9% higher.
• In April 2022 though, the Q1 CPI miss, coupled with the strengthening USD trend, drove a sharp NZD/USD sell-off.
• The chart below plots the average performance of NZD/USD in the 2 weeks prior and 2 weeks after CPI prints since the start of 2021. On average, NZD is 0.40% higher 2 weeks post, flat after the first week. If we exclude the April 2022 result it is 1% firmer. The 2 other lines on the chart represent the worst (April 2022) and best (October 2022) outcomes post CPI prints for this sample period.
• An upside surprise tomorrow may not carry as much weight as it did in 2022, given we are arguably closer to the end of the tightening cycle.
• A downside surprise may temper peak RBNZ expectations, but softer USD momentum/better risk appetite in the equity space, may help contain the fallout for NZD.

Fig 2: NZD/USD Reaction 2weeks Before & 2weeks After CPI Prints (2021-2022)

Source: MNI - Market News/Bloomberg