Comment on NZ inflation (16 July)
Contrary to our expectation, the core NZ inflation data has lifted, generating a picture of accelerating inflation after being long stagnant below the RBNZ 2% target.
The NZD has shot up after the RBNZ released its analytical series, the Sectoral Factor Model. This is their preferred underlying measure, and it had been little moved at 1.4 to 1.5% since Q3-2015. Today the RBNZ revised up the Q1 reading to 1.6% and reported Q2 at 1.7%; a significant shift for this series.
The NZD may be experiencing a bit of a short squeeze which may underpin the currency in the near term. NZD is up around 0.8%. NZ 2yr swap rates were up 3bp, but have eased back to only up 1bp.
Strength in the NZD is tending to drag up the AUD as well.
The inflation data seems to remove the risk that the RBNZ might consider cutting rates again, and makes the next move more likely to be a hike, although the timing remains distant.
We have a decision to make as to whether to close out of our short NZD/CAD position and/or long EUR/AUD position following this data release.
There is no doubt that the inflation data makes the picture more positive for the NZD. However, after the NZD jump on the data, we are not convinced it should continue to rise. We expect policymakers will be cautious to change their view. Inflation still has to rise to meet the 2% inflation target. A range of activity indicators suggest that the NZ economy has slowed to be only at or below trend growth. It remains to be seen if inflation will continue to rise or again stabilize closer to, but still below target.
Furthermore, milk futures prices have declined somewhat further in the last two weeks after a sizeable fall following the GDT biweekly dairy auction on 3-July. The next auction is later today and may limit further upside in the NZD.
Australian labour force data are due this Thursday. Some recent indicators such as the NAB business survey employment component suggest jobs data may not be as strong as expected.
Canadian existing home sales showed recovery in June today. Canadian inflation data is due on Friday. We have no strong guide as to how this will go. The market is expecting core measures to remain at 1.9% for a fifth month in a row in June, just below the BoC target.
The recent fall in oil prices may be weighing on the CAD somewhat.
As such we have decided to stay with our existing strategy for these currencies’
Positions
Long half unit GBP/JPY at 148.21; s/l 146.43; t/p 149.98
Long half unit of EUR/AUD at 1.5824; s/l 1.5673; t/p 1.7234
Short half unit NZD/CAD at 0.8914; s/l 0.9013; t/p 0.8513
Short half unit NZD/CAD at 0.8914; s/l 0.9013; t/p 0.8513
(Chart: NZ inflation indicators %y/y)
(Chart: Quarterly weighted median and trimmed mean %q/q – also firmer in the last two quarters)