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Talking Points
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New Zealand Dollar appreciates against its major counterparts
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NZ 1Q CPI 0.4% y/y versus 0.4% expected and 0.1% in 4Q 2015
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Government bond yields rally as RBNZ rate cut expectations fall
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The New Zealand Dollar gained against its major peers after the nation’s CPI data crossed the wires. The move to the upside followed a gap to the downside after the Doha oil freeze meeting triggered risk aversion. Consumer prices increased 0.4 percent year-over-year (Y/Y) in the first quarter of 2016, in-line with expectations. Retail prices rose 0.2 percent quarter-over-quarter (Q/Q), beating the 0.1 percent estimate.
Overnight index swaps are currently pricing in at least one Reserve Bank of New Zealand interest rate cut over the next 12 months. After the inflation data was released, New Zealand front-end government bond yields rallied more than 0.25 percent and have maintained gains since. This suggests that the markets interpreted the data as justification to delay a rate cut by the RBNZ.
With the surprise Reserve Bank of New Zealand interest rate cut in March, the central bank noted that there was a decline in a range of inflation expectation measures. Members stated that further policy easing may be required should average future price forecasts fall outside of the 2-3 percent inflation target over the medium term. Today’s data appears to show that CPI is heading in the right direction – albeit, very early in the effort. That being said, the markets are pricing in a 28 percent chance of a 25 basis point rate cut at its next meeting on April 27th.
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