New Zealand dollar gains on inflation beat, markets ponder May rate hike

SYDNEY: The New Zealand dollar gained on Tuesday after a hot inflation reading had markets flirting with the idea of a rate hike as soon as next month, while bond yields jumped to end a five-day declining streak.

New Zealand’s consumer inflation picked up to 0.9% in the first quarter, data showed, faster than expected, and left the annual pace steady at 3.1%, holding above the central bank’s target band of 1%-3% for two straight quarters.

The report only captured the initial impact from the Iran war but was enough to spook investors to price in a 45% probability that the Reserve Bank of New Zealand would have to lift the current 2.25% cash rate by a quarter-point next month, up from just 27% a day earlier.

A total tightening of 82 basis points is now expected, up from 70 bps a day ago, even as the Iran war threatened to derail the nascent economic recovery.

As a result, the kiwi dollar rose 0.4% to $0.5913, having edged up 0.2% overnight to bounce off a one-week low of $0.5849. Resistance is now at a five-week top of $0.5929 and $0.5964.

Two-year government bond yields jumped 9 basis points to 3.555%.

“We had hoped to see some more disinflation, but we didn’t see enough of it,” said Jarrod Kerr, chief economist at Kiwibank.

“Today’s report does not support immediate rate hikes as priced in the market … but it does highlight the awkward starting point for inflation leading into the conflict in the Middle East.”

A private sector survey on Tuesday showed business confidence sank in the first quarter, with a net 4% of firms surveyed expecting general business conditions to worsen compared with 48% optimism in the previous quarter.

Across the Tasman Sea, the Australian dollar held steady at $0.7181, after inching up 0.2% overnight.

Resistance is heavy at the four-year top of $0.7222, with all eyes on the Middle East headlines before a ceasefire expires late on Wednesday.

The Aussie also lost 0.4% versus the kiwi to NZ$1.2132, having climbed to a 13-year top of NZ$1.2206 earlier in the day.

Markets are wagering there is a 75% chance that the Reserve Bank of Australia will deliver a third straight rate hike in May, with rates seen peaking at 4.6% by the end of the year.