The long-awaited New Zealand CPI is underway. The release almost always guarantees volatility, especially as it’s only released 4 times a year. As always, the numbers are only half the story, the other half being market expectation and implications further down the line. We’ve studied and followed NZD’s buyers and sellers over the past couple of months, and cornered the market. Here is how we’ll play the event:
Background
Over the past few months, NZDUSD experienced sharp selling pressure on the back of lower than anticipated inflation because of the RBNZ dual mandate to make future rate increases contingent on inflation and employment data. Lower inflation puts downward pressure on interest rates and The Market perceived that as negative. Add to that some less than stellar econ data and falling dairy auction prices, currency traders drove the pair down.
Meet the Bulls
COT data positioning revealing a constructive view on NZD with longs outpowering bears about 69% to 31%. Latest dairy auction printed an uptick of 2.7%, in face of growing global demand and lower supply, all of which points at a trend of higher prices to come. Both are positive factors for the NZD.
What really turned NZD fortunes around was risk unwind of the RBNZ dual mandate. Investors were jittery and unsure how this will pan out, thus shorted the pair aggressively, probably overreacting, since the dual mandate has still to pan out and show it’s hand, so to say. Hollisticly, the lack of evidence for the RBNZ doesn’t pose a threat to NZD appreciation. All of this leaves us with the upcoming CPI report.
Meet the Bears
The latest RBNZ communication pointed to a softer CPI reading. Anticipated is 0.5% increase q/q and a 1.1% y/y reading. So a lower reading is anticipated and communicated to market. That’s why we saw NZDUSD dropping following better dairy auction. Interestingly, RBNZ target range is 1%-3% annual inflation. So if the release comes in too low and drags the annual reading below target, there is a real threat of RBNZ communicating interest rate cuts and a full blown long covering to follow.
Battleplan
We’re looking for a q/q reading of 0.5% or greater to play into the NZDUSD bull narrative. Which poses a real opportunity to crack K.O barrier at 0.7400.
Reading between 0.4% to 0.3% is a complex play. As it would keep the year over year reading close to 1%, but bulls could absorb selling pressures.
Anything under 0.3% reading will see a strong decline and an instant opportunity to capitalize on a selloff.
We’ll cover the event live in our trading room, with complete technical analysis breakdown on levels and how to trade the event for profits. Please feel free to view our offer here.
Miad Kasravi
Speculators Trading