New Zealand Dollar Rises in Response to Rising Inflationary Pressures

Inflation expectations were released in New Zealand, and the indicator rose for the sixth time in a row. Inflation expectations can lead to real inflation, hence this metric is closely studied. The third-quarter release was 2.96 percent, up from 2.27 percent in the previous quarter.

The result boosted the New Zealand dollar and increased the chances of the RBNZ hiking interest rates at its policy meeting next week. With a 25-bps boost in October, the RBNZ became one of the first central banks to raise rates since the epidemic began. The central bank is planning a succession of rate hikes through 2022, and the market’s primary concern is whether it will boost rates by 25 basis points or go for broke with a 50-basis-point hike.

Inflation in the United States continues to rise, but this hasn’t deterred consumers from spending, as retail sales rose 1.7 percent in October, up from 0.7 percent the month before. Core retail sales increased by the same amount, from 0.8 percent to 0.9 percent. Markets are growing concerned that the Fed may be forced to respond to the recent spike in inflation, as the argument that inflation is cyclical appears to be out of touch with reality. The financial markets may experience some turbulence if the Fed reduces its purchases.

Inflation is causing agony in the White House, as US voters may punish Democrats in the 2022 mid-term election over increasing costs. President Joe Biden will also have to make a significant decision about who will lead the Federal Reserve shortly. The favorites are Fed members Jerome Powell and Lael Brainard, with Brainard being more dovish, which might imply interest rates stay lower for longer, which would be good for equities and unfavorable for the US currency.

Newzealand Dollar Expected To Rise to 0.74 Versus US Dollar

Economists predict that the New Zealand dollar will have a good year in 2022. They expect the NZD/USD to gradually rise towards 0.74 in the coming year. The market will have to lower its expectations for austerity in 2022, but signs of continued inflation throughout the year should trigger speculation that the austerity cycle will have to continue in 2023-24 and set a bottom line below the New Zealand dollar.

The next year, This currency should have the most attractive spreads in the G10, so it should benefit more from the low volatility period and supported risk sentiment than other currencies. The New Zealand Central Bank’s austerity policy should be supported by strong domestic economic conditions. The rebound in tourism and education will provide additional impetus to the economy.

Milk and forestry prices (the two major export products) are still much higher than in the past five years. Even if there is a correction in 2022, the export industry should continue to support the recovery. However, the huge downside risk facing the New Zealand dollar in 2022 is sentiment related to China, which is still quite uncertain due to the government’s crackdown on certain industries and the potential economic slowdown.