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Recent NZD Weakness in Focus as Q2 CPI Awaited

NEW ZEALAND
  • Q2 NZ CPI prints on Wednesday and Bloomberg consensus expects headline to moderate to 0.5% q/q and 3.4% y/y from 0.6% and 4% in Q1. The most recent dovish tilt from the RBNZ has prompted NZD to significantly underperform its G10 counterparts in July. Given the positive risk backdrop and potentially stretched RBNZ pricing, risk reward at this juncture might be tilted towards a positive outcome for the local currency.
  • The central bank will present revised forecasts at its August 14 meeting and Q2 CPI will be important in determining if the return to target is brought forward and thus also the first rate cut in the OCR profile. But it will be core and non-tradeables that will determine if the RBNZ cut in August.
  • Currently there are over 50bps of cuts expected over the three RBNZ meetings by year-end. We pointed out yesterday that some desks have noted these expectations seem to be relatively stretched at this point, potentially setting a high bar for tomorrow’s data to confirm the market’s bias.
  • Despite the near 2% move lower for the dollar index in July, NZDUSD remains lower on the month, especially notable given the more favourable backdrop for risk/equities. Arguing the case that NZD still remains vulnerable is CFTC positioning data, which despite being trimmed by 2,920 contracts last week, still shows a net NZD long of 12,671.
  • However, the psychological 0.6000 mark also appears to be a pivotal level on the chart and given current overnight NZDUSD straddle pricing points to a 35 pip breakeven, this may provide a greater risk/reward profile for longs at this juncture.
  • Furthermore, Goldman Sachs highlighted that stretched central bank pricing could also signal further AUDNZD upside might become more limited over the near-term, with the cross having reached the highest point since October 2022 earlier in today’s session.
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