NZD/USD: Slower Inflation Weakens the Kiwi

The New Zealand dollar is foreseen to incur losses opposite the US dollar today as the Kiwi nation’s annual inflation hit its lowest level in nearly 13 years in September, reflecting a strong currency and a slack domestic economy. Meanwhile, the Greenback is believed to be supported by a larger-than-expected increase in Retail Sales and a bullish economic outlook by Federal Reserve Bank of St. Louis President James Bullard.

Statistics New Zealand reported earlier today that consumer prices rose at a tepid pace in the third quarter, taking the annual pace of inflation below the Reserve Bank of New Zealand’s target band. The Consumer Price Index inclined by only 0.3 percent in the September quarter, slower than the 0.5 percent forecast. Annual inflation slowed to just 0.8 percent, coming in below the 1.0 percent estimate and outside the RBNZ’s target band of between 1 percent and 3 percent. The annual rate has not moved by such a small amount since it rose 0.5 percent for the year to December 1999. Economists say that annual inflation was extremely low in part because of slumping electronics prices, with audio-visual equipment down 18 percent in the past year, milk lower by more than 9 percent, and phone service costs sharply lower. Over the quarter, transport price dropped 1.1 percent, petrol 1 percent, and fresh milk prices 3.8 percent.

Inflation has been subdued for the past year as the high Kiwi continues to hold down import prices. Meanwhile, a subdued local economy also means retailers have had little scope to increase prices. However, analysts say that the Canterbury rebuild will continuously apply pressure on construction costs, forcing them to forecast annual inflation to drift back up to more than 2 percent by late next year. Nonetheless, the softness of the inflation figures has led some to think that the RBNZ could cut interest rates later this month. The Green Party immediately expressed that with inflation below the target band, the central bank has scope to cut borrowing costs from 2.5 percent in its next meeting. Green Party co-leader Dr. Russel Norman said that cutting the OCR is a first step to addressing the overvalued currency, which is hurting exports and manufacturers. Amid this outlook, the Kiwi is seen to fall today.

Meanwhile, strong consumer spending is foreseen to buoy the US economy in the second half of the year after the US Commerce Department reported that Retail Sales jumped by 1.1 percent in September, exceeding forecasts of a 0.7 percent increase. Gains were broad-based, with 12 out of 13 retail categories rising as higher stock prices, a budding housing recovery and improved job prospects helping confidence. Such optimism was echoed by the St. Louis Fed’s James Bullard, who said that economic growth will likely pick up to 3.5 percent next year, which would push the Jobless Rate down near 7 percent. Considering these, a short position is advised for the NZD/USD trades today.

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