Risk-off backdrop prompts NZD correction

Daily Currency Update

NZD - New Zealand DollarThe New Zealand dollar closed lower through trade on Tuesday, forced below 0.7170 amid a USD rebound and risk-off backdrop. Having tested a break above 0.72 and touched highs at 0.7230 through the latter half of the domestic session, the NZD was driven lower overnight as investors sought to correct the recent risk-on upswing. With little headline data on hand to drive direction, markets appeared plagued by an ongoing lack of conviction shifting toward a risk-off mood in a bid to correct recent gains across commodity currencies, equities and bond yields. Attentions today turn to domestic CPI data as a key marker governing interest rate expectations. While we anticipate quarterly inflation will print near or at 0.8% and annual inflation will fall well short of the RBNZ’s 2% target a surprise uptick could bring forward expectations for cash rate adjustment. The RBNZ has pledged to look through transition inflation pressures, but with expectations prices will rise in coming quarters, a quicker than expected uptick may prompt markets to price in a rate hike in Q1 2022, a schedule well ahead of other major central banks and a possible catalyst to extend NZD upside.