FxWirePro: New Zealand's upbeat GDP reduces prospects of OCR cut, so as US CPI for Fed hikes, lead NZD/USD at 1-year highs

NZ produced the upbeat GDP QoQ numbers last week, actual 0.7% versus forecasts at 0.5%.

New Zealand economy advanced a seasonally adjusted 0.7 pct in Q1 of 2016, following 0.9 pct expansion in the previous period and above market expectations of a 0.5 pct increase.

The latest growth was driven by the construction and health industries but partly offset by decreases in the primary industries and manufacturing. Year-on-year, the economy expanded 2.8 pct. 

Despite the lingering expectations of the traders, the RBNZ may have brought in surprising cut rates but the central bank in recent times have also hinted the easing cycle would be over and that turned what ordinarily would be a currency negative event (a 25bps cut that was only 60% priced in ahead of the meeting) into something currency-positive.

On the flip side, Fed’s deferral on rate hiking cycle due to various considerable reasons (especially US CPI, job market pressures and global slowdown) may hamper dollar prospects.

US CPI MoM prints at 0.2% versus forecasts at 0.3% and previous 0.4%.

Consumer prices in the United States have gone up 1 pct YoY in May of 2016, slowing slightly from a 1.1 pct rise in April. Figures came below market expectations of 1.1 pct as inflation for food and transportation services slowed while energy cost fell at a faster pace. Yet, core inflation accelerated slightly to 2.2 pct. 

Fed chief Yellen said on Tuesday the central bank's ability to raise interest rates this year may fulcrum on a rebound in hiring that would convince policymakers the U.S. economy isn't faltering.

Yellen's cautious tone on future rate hikes added to a subdued mood in markets.

Pondering over above fundamental developments that could factor in NZDUSD, looking indecisive after yesterday’s multi-month high and just a day out from the UK referendum. We don’t expect it to stray too far from 0.7180 on the day.

Having said that, if not in near terms, in order to stimulate the economy, three months ahead we could also foresee markets pricing in further RBNZ easing (we expect a cut to 2.0% in August) and also pricing a greater chance of US Fed rate hikes. The NZ-US interest rate outlook thus argues for a lower NZD/USD, towards 0.6500.