The central bank’s policy has been “snooked”, but the New Zealand dollar has soared but dared not relax

On Thursday (October 14), driven by multiple positives, the New Zealand dollar rose more than 1% against the US dollar, a two-and-a-half-week high. Although U.S. inflation data showed that prices rose strongly last month and commodity prices reached new highs, the yields of longer-term Treasury bonds continued to fall. At the same time, the Fed’s meeting minutes confirmed that it would start reducing bond purchases "soon", and the policy further clearly triggered the dollar. The bulls took a profit. It is worth noting that a large part of the Fed’s reduction or the previous interest rate hike by the Reserve Bank of New Zealand has been included in the price. Therefore, the New Zealand dollar against the US dollar long market outlook still needs to be cautious.

The Fed’s November reduction was in line with market expectations, and the U.S. dollar bulls took profits

The expectation that the Fed will tighten monetary policy faster has pushed the dollar higher since the beginning of September. However, the recent rise has eased. On Thursday, even after the minutes of the Fed’s September meeting confirmed that it may start to reduce stimulus measures this year, the dollar is still expected to record its second two-day decline this year.

Neil Jones, head of foreign exchange sales at Mizuho, said: “This seems to be a typical mentality of buying in rumours and selling in facts. I think the Fed has confirmed many investors’ expectations, and currently there is only a liquidation of long US dollar positions. The situation is that the profit has taken a long US dollar position, because the Fed’s tightening policy has been factored into the price factor to some extent."

CPI rose steadily, commodity prices reached new highs, and inflation concerns increased

A report by the US Labor Department showed that the US Consumer Price Index (CPI) rose steadily in September. Analysts expect the consumer price index to rise by 0.3% last month, but it actually rose by 0.4%. The total consumer price level (CPI) rose 5.4% year-on-year, up from 5.3% in August. The core CPI rose by 0.2% in September, after rising by 0.1% in August. In the context of soaring energy prices, the CPI may rise further, which may force the Fed to act faster to normalize policy.

After the report was released, the US bond yields fell, indicating that the market has not yet digested the impact of continued inflation. Short-term interest rate expectations are usually accompanied by higher yields. After rising to a three-and-a-half-month high last Friday, the spread between two-year and ten-year US Treasury bonds narrowed to their lowest level in two weeks.

At the same time, on Thursday, the Bloomberg Commodity Index rose to 104.59, a new high since April 2016.

The Fed may raise interest rates ahead of schedule, the dollar's decline may not continue

The energy crisis and rising commodities have raised concerns about inflation, increasing the possibility that the Fed may have to act sooner than expected to normalize policy. The minutes of the Fed’s September meeting also showed that more and more policymakers are worried that high inflation may continue. Previously, the market expected interest rates to increase in December 2022, but the market now expects interest rates to increase in September. Jones said: "I don't expect the dollar to weaken to continue, and we will return to a longer-term bull market trend."

A strategist at ING wrote in a report to clients: "Today's US PPI data should remind people that the Fed needs to be more vigilant about inflation."

New Zealand dollar has continued to rise strongly, but interest rate hikes have limited benefits

On Thursday, GMT+8 20:30 announced that the number of initial claims for unemployment benefits in the United States as of October 9th was lower than expected, and the September PPI was lower than expected. The New Zealand dollar's gain against the US dollar once expanded to 1.06%, a two-and-a-half-week high to 0.7038.

On the other hand, last week's decision to raise interest rates by the Reserve Bank of New Zealand was based on certain support from the New Zealand dollar. The New Zealand dollar rose nearly 1% against the US dollar in a day, setting a new high in nearly three weeks. However, Morgan Stanley strategists such as Matthew Hornbach said in a report that the hawkish stance of the Reserve Bank of New Zealand has been fully reflected in the price, and the market position is already long. Although the current decline in the U.S. dollar and rising commodities still support the New Zealand dollar’s gains, investors must remain cautious.


(New Zealand dollar against the U.S. dollar daily chart)

GMT+8 At 20:54 on October 14th, the New Zealand dollar was quoted at 0.7039/41 against the U.S. dollar