NZD/USD builds cushion around 0.5560, focus shifts to NZ inflation

• NZD/USD has sensed demand from around 0.5560 amid an improvement in the risk appetite.
• Improvement in US CPI has left no other option for the Fed than to continue the current pace of rate hike.
• Kiwi’s inflation rate for Q3 is expected to decline to 6.6% vs. the prior release of 7.3%.

The NZD/USD pair is displaying a rebound move after witnessing exhaustion in the downside momentum. The major has given an upside break of the consolidation formed in a narrow range of 0.5550-0.5567 as the risk-off impulse has taken a sigh of relief after remaining in the spotlight. S&P500 futures have rebounded firmly after a bearish Friday, therefore, the risk appetite is emerging now.

The US dollar index (DXY) has dropped in the initial trade to near 113.10 as the risk-on impulse has rebounded. It seems that investors have started shrugging off the fears of a bigger rate hike by the Federal Reserve (Fed). After the release of bigger-than-projected inflation numbers last week, odds of a fourth consecutive 75 basis points (bps) rate hike have jumped dramatically. As per the CME FedWatch tool, the chances of an increment in the interest rates by 75 bps stand at 99.4%.

The impact of accelerating rate hikes by the Fed seems absent on the price pressures. The core CPI that excludes oil and food prices stepped up to 6.6% vs. the expectations of 6.5% and the prior release of 6.3%. While the headline CPI increased to 8.2% from the projections of 8.1% but lower than the prior release of 8.3%. It seems ‘fit and proper to claim that the responsiveness of decline in headline CPI with the extent of increment in rate hike is extremely poor while the relationship with core CPI stands positive.  Therefore, the Fed has been left with no other option than to tighten its policy measures further.

On the NZ front, investors are awaiting the release of Tuesday’s inflation data. Projections for annual inflation data for the third quarter are extremely lower at 6.6% vs. the former release of 7.3%. A drop of 70 bps looks mouth-watering from the front of Reserve Bank of New Zealand (RBNZ) policymakers. An occurrence of the same would bolster the case of a slowdown in the current pace of hike in the Official Cash Rate (OCR) by the RBNZ.