Summary:

• New Zealand’s inflation misses forecasts remarkably making a rate hikes yet more distant
• Some changes to NZ labour market policy “designed to lift wages”
• US dollar continues plummeting, commodities strengthen, stocks lose some steam

It was a bit of shock when the NZ inflation report was released sending the domestic currency vastly lower. However, downbeat moods did not last too long as USD weakness came back and therefore helped other currencies in the G10 group. Let us recall that today is all about the ECB meeting which seems to be a major source of risk for EUR traders especially as the common currency pushed yet higher during the Asian session.

NZ inflation slowed down in the final three months of 2017 pushing back rate hike odds. Source: Macrobond, XTB Research

Inflation in the final quarter of the past year slowed down from 1.9% yoy to 1.6% yoy while nobody had expected a change. In a quarter-over quarter basis there was a considerable slowdown as well from 0.5% to 0.1% while economists surveyed by Bloomberg has forecast a tiny decrease to 0.4%. Keep in mind that prior to the release the RBNZ was pretty much in a wait and see mode but there were some banks foretelling the first rate increase as soon as the end of 2018. Everything complicated after the gloomy inflation reading in spite of the fact that RBNZ’s own inflation stayed at 1.4% yoy (unchanged from the third quarter). As a result, odds for a hike in November slumped from more than 72% to below 58% after the release.
Some banks such us ANZ chose to push back its own rate hike forecast expecting there will no a change in rates until the middle of 2019. ASB also expressed some doubts with regard to the backdrop of the future rate hikes underlining that today’s inflation data suggests that “inflation has yet to stage a convincing comeback”.

The NZDUSD made a slump yesterday evening in a knee-jerk move following the inflation data. Nevertheless the NZ currency is right now the best one in the G10 basket being fully shored up by the slumping US dollar. Another target to tick might be found a notch below 0.75. Source: xStation5

Notice that the NZ dollar is the best currency among its major peers at the time of writing despite so grim inflation, however its strength stems solely from the declining greenback which remains vastly on the back foot another day in a row. Has the US dollar already become a fall guy? It’s possible however the EURUSD almost above 1.2450 makes today’s ECB meeting yet more interesting and increases odds to see a health pullback in the shared currency.

Apart from inflation we got some politics news from the NZ economy, namely an amendment to Employment Relations Act announced by Workplace Relations and Safety minister. The act will limit the use of 90-day trial periods to businesses with fewer than 20 employees and is focused on lifting wages through collective bargaining. Moreover, the bill “is designed to provide greater protections to workers, especially vulnerable ones, and strengthen the role of collective bargaining in the workplace to ensure fair wages and conditions”.

Gold prices seem to be dangerously high being pushed just by US dollar weakness. A supply zone nearby $1375 could end the ongoing rally. Source: xStation5

While the US dollar is tumbling, commodities are performing outstandingly well. Brent prices are already above a $71 handle, WTI prices have already crossed $66, gold is nearing a significant supply zone while equity markets all around the world have witnessed a decrease. After heavy declines in Europe, Wall Street were unable to make fresh highs, however there was almost no a pullback anyway. Asian stock markets take the cure from their counterparts and closed the day lower with the NIKKEI (JAP225) falling 1.15%.