US inflation surprise spurs overnight volatility

Daily Currency Update

The New Zealand dollar enjoyed a bumpy ride through the overnight session as markets responded to the latest upside surprise in US inflation pressures. Having tracked sideways through local trade the NZD gave up 0.6690, dipping to intraday lows at 0.6657, as US inflation data for January showed a surprise surge in price pressures. The uptick in inflation markets the 8^th print of the last 10 that inflation data has surprised to the upside and all but guarantees the Fed will raise rates by 50 basis points next month. Having rushed to firm bets for a US rate hike, markets curiously turned on the USD relinquishing gains and allowing the NZD to pulse back through 0.67 to mark session highs at 0.6730. The NZD was however unable to hold onto gains slipping into the daily close and this morning’s open.

Our attentions turn now to domestic inflation expectations. The RBNZ inflation expectation survey is due today with 2-year inflation rates expected to test 3% and 5-year rates closing in on 2%. With medium term inflation estimates key in shaping policy expectations we may see some volatility into the weekly close.