New Zealand Dollar Knocks on Key Levels in Post-CPI Market Rally

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The New Zealand Dollar was an obvious winner after the U.S. printed a softer-than-expected inflation print that raised hopes for an accelerated global interest rate easing cycle, creating the potential for further gains in the coming days.

The New Zealand Dollar advanced by more than a per cent against the U.S. Dollar (NZD/USD 0.6209) and 0.13% against the Pound (GBP/NZD 2.0707) after the U.S. reported inflation was flat at 0% month-on-month in May, which was below expectations for a small gain. Crucially, core inflation fell to 0.2% from 0.3%, which is below the expected level of 0.3%.

Markets moved to fully price in a rate cut at the Federal Reserve by September following a release that suggests the disinflation process is resuming once more.

Global stocks and commodity prices are advancing amidst hopes that lower interest rates at the Federal Reserve would fuel global economic growth.

"Risk-sensitive currencies are climbing," says Karl Schamotta, Chief Market Strategist at Corpay. The New Zealand Dollar is considered a risk-sensitive currency that tends to advance when stock markets are rising.

The NZD is one of the better-performing of the major currencies since early May, helped mainly by buoyant investor sentiment.

"An unexpectedly swift cooling in underlying price measures should move Fed officials closer toward achieving the level of confidence needed to begin cutting rates, and help ratify Chair Powell’s consistent easing bias," says Schamotta.

With a dearth of major economic data releases or central bank events due out of New Zealand this week, the Kiwi Dollar will likely continue to take its cues from global sentiment.

With risks associated with the weekend's European elections looking contained, the market could well extend its post-CPI gains.

Above: NZD/USD (top) and GBP/NZD, showing the approach of key areas. Track NZD with your own custom rate alerts. Set Up Here

This can take the NZD/USD to the top of its medium-term range at 0.6217, which means traders will be eyeing a break into highs not seen since the start of the year.

The GBP/NZD exchange rate still has some work to do if it is to test the previous week's lows at 2.0609.

However, if sentiment remains buoyant, a break of this level can eventually transpire in the second half of June, potentially setting up a run towards 2.0382.

"With a raft of data releases set to drop over the next three months, September should remain a live meeting, with a significant contingent of investors expecting a move before the US election reaches its crescendo. Rate differentials should narrow against the dollar, generating short-term underperformance relative to other majors, and risk appetite will almost certainly rebound in the near term," says Schamotta.