Kiwi Tailspin Set to Worsen as RBNZ Puts Inflation Before Jobs

(Bloomberg) -- The rout in the kiwi may have begun. Just as the U.S. 10-year yield topped 3 percent, New Zealand’s central bank has signaled it’s nowhere near raising rates despite the tight labor market as inflation remains muted.

Money markets are now pricing just a 26 percent chance of a rate hike by November. This is down from the 72 percent probability at the start of the year when the unemployment rate fell to its lowest since 2008, fueling bets the central bank was about to raise interest rates.

With the U.S. 10-year yield pushing above 3 percent, pressure on the kiwi from widening rate differential looks set to increase, even if data next week reveals another decade-low in the unemployment rate. The Reserve Bank of New Zealand seems in no hurry to tighten.

The kiwi has skidded nearly every day since April 16 when Governor Adrian Orr stressed that returning inflation to the central bank’s desired range remains a top priority in the dual mandate which includes full employment. He further clarified on April 19 that “we are doggedly determined to aim for 2 percent" inflation, which is quite some way from 1.1 percent last quarter.

The selloff is understandable given the extent traders have had to back-pedal on rate hike expectations which surged when the central bank adopted its new mandate earlier this year.

The kiwi has slumped more than 4 percent since reaching a two-month high on April 13 when it received a boost against the Australian dollar due to the U.S.-China trade spat. More ominously, it has bearishly breached support at the bottom of the last three months trading range. A break below a key trendline near-term could open the way for a test of support at 0.6954.

Leveraged funds may exacerbate the decline given the extent of long positions. According to Commodity Futures Trading Commission data, they held a net long kiwi position of 22,019 contracts in the week ended April 17, the most since August.

As Treasury yields climb to four-year highs, the kiwi isn’t alone in its struggle against the U.S. dollar. But traders may also be paying the price for having read too much into the RBNZ’s new dual mandate.

Below are key Asian economic data and events due next week:

  • Monday April 30: New Zealand ANZ business confidence outlook, China PMIs, Thailand trade balance/BoP current account balance
  • Tuesday, May 1: RBA rate decision, RBA Gov. Lowe speaks, New Zealand building permits, Japan Nikkei PMI manufacturing, Thailand CPI
  • Wednesday, May 2: New Zealand 1Q employment and house prices, Japan Nikkei services/composite PMI, China Caixin PMI manufacturing, Indonesia CPI
  • Thursday, May 3: Australia trade balance, New Zealand ANZ job advertisements, Thailand consumer confidence
  • Friday, May 4: RBA statement on monetary policy, China 1Q BoP current account balance, Indonesian consumer confidence, Malaysian trade balance, China Caixin PMI composite/services

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