New Zealand dollar higher as inflation surprises, yields jump

SYDNEY: The New Zealand dollar rose against the greenback on Monday, as inflation jumped above expectations to a decade high, putting pressure on the central bank to accelerate its rate rising cycle, which sent bond yields surging.

The kiwi dollar rose 0.14% to $0.7082, after briefly testing resistance at the $0.7105 level, a four-week high, as the inflation numbers were released earlier in the session. Support lies around $0.6965.

New Zealand's quarterly inflation gauge rose 2.2% in the September quarter, pushed by a mix of temporary factors, from 1.3% in June, the strongest quarterly increase in consumer prices since the 1980's, excluding the rise in the good and services tax (GST) in 2010.

New Zealand dollar slips as rate rise proves anti-climactic

Equivalent to an annual rate of 4.9%, the CPI number beat market expectations and those of the Reserve Bank of New Zealand (RBNZ), which had estimated inflation would rise only to 1.4% in the third quarter.

"We have expected the RBNZ to hike at the next two meetings and this result will keep them on track for that," said JPMorgan Chief Australia and New Zealand economist Ben Jarman.

The RBNZ raised interest rates for the first time in seven years earlier this month, the second major developed economy to do so, and signalled more tightening to come as it tries to keep inflation around its target 1-3% range and to cool a red-hot housing market.

As investors adjusted expectations, New Zealand yields jumped between 15 and 17 basis points at the short end of the curve, and between nine and 12 basis points at the longer end.

The 10-year bond benchmark yield stood 12 basis points higher at 2.325%, the highest since early 2019 and 61 basis points above Australian yields, which on Monday were 5 basis points higher at 1.69%.

"For interest rate markets, it is less about what the RBNZ will do next - which was already pretty obvious - and more about how much they may need to do in the future," Australia and New Zealand Chief Economist, Sharon Zollner said in a note to clients.

The Aussie was trading slightly weaker at $0.7413, as economic data from China, for which the currency is used as a proxy by traders, printed behind expectations. China's economy grew at 4.9% in the third quarter, its slowest pace in a year in the third quarter, hurt by power shortages, supply bottlenecks and sporadic COVID-19 outbreaks.