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Brown Brothers Harriman’s (BBH) Elias Haddad reports that NZD is outperforming after hotter-than-expected Q1 Consumer Price Index (CPI), with headline inflation at 3.1% y/y versus the RBNZ’s 2.8% projection. Markets now price 100 bps of hikes to 3.25% over 12 months, but BBH argues contained underlying inflation and spare capacity justify fewer hikes, expecting NZD/USD to hold in a 0.5800–0.6000 near-term range.
Market pricing seen too aggressive
“New Zealand Q1 inflation ran hot. Headline CPI rose 0.9% q/q (consensus: 0.8%, RBNZ projection: 0.6%) vs. 0.6% in Q4 to be up 3.1% y/y (consensus: 2.9%, RBNZ projection: 2.8%) vs. 3.1% in Q4.”
“The swaps curve has more than fully priced in a total of 100bps of policy rate increases to 3.25% over the next twelve months.”
“However, contained underlying inflation and ample spare capacity in New Zealand’s economy argue for less rate hikes than markets imply.”
“NZD/USD will likely trade within a 0.5800 and 0.6000 range in the near term.”
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