On Tuesday, the downward trend of the US Dollar (USD) persisted, marking its fifth decline in six trading days, just ahead of the crucial US inflation report scheduled for today.
The March inflation figures hold significant sway over expectations concerning a potential Federal Reserve rate cut in June. A robust inflation figure might squash hopes for a June rate cut, whereas a figure in line with or below forecasts could sustain these hopes. According to Reuters, analysts anticipate a rise in annual headline inflation from 3.2% to 3.4%, while core inflation is projected to dip from 3.8% to 3.7%.
Despite ongoing concerns in financial markets about monthly fluctuations in US inflation, the data reveals that headline inflation has hovered around 3.5% for nearly a year, with core inflation remaining close to 4.0% for over six months. Both figures mark a considerable decrease from the highs observed in 2022, when headline inflation peaked at 9.1% in June and core inflation hit 6.6% in September. Looking ahead, there are indications that US inflation may eventually trend downward, particularly as the more persistent components of inflation, excluding shelter costs, are showing a decline. Nevertheless, elevated housing expenses, particularly rent, remain a significant risk factor.
The Australian Dollar (AUD) and New Zealand Dollars (NZD) led in gains, with both currencies climbing by 0.4% prior to today's Reserve Bank of New Zealand decision scheduled for 2:00 pm NZST. Similar to its stance in late February, the Reserve Bank of New Zealand appears poised to offer cautiously balanced guidance and maintain an unchanged cash rate of 5.50%.
Since their previous meeting, there have been declines in food and dairy prices, a more significant contraction in GDP than expected, and a generally dovish tone from other major central banks. However, the NZD has also depreciated, while oil prices have risen. Overall, we perceive the risks to be relatively evenly distributed, although we do not foresee a substantial shift in policy stance at this juncture.
Before seriously considering arguments for rate cuts, it's likely that the RBNZ board will want to assess the Q1 CPI, expected on April 17th, revised staff estimates on May 22nd, and the upcoming budget announcement on May 30th. We anticipate the first 25 basis point rate cut to occur in August, with a total of 75 basis points of easing anticipated throughout the year. Consequently, there may be limited upside for the NZD/USD pair in the medium term.
