NZD Update: Non-Tradeable Inflation Poses a Hawkish Opportunity for RBNZ Amidst Economic Consider

NZD: Non-tradeable inflation offers RBNZ a hawkish "loophole"

New Zealand’s inflation matched estimates at 0.5% quarter-on-quarter and 4.7% YoY in the 4Q print published overnight. This is a touch higher than our forecast (4.6%), but well below the 5.0% projected by the Reserve Bank of New Zealand for the period. However, non-tradeable CPI did come in hotter than expected at 1.1% QoQ, which has led to a move higher in short-term NZD rates. In FX, NZD/USD broke back above 0.6100 on the release, even though it quickly defaulted to being traded by external factors.

The stronger non-tradeable CPI may offer an excuse for the RBNZ to stick to some hawkish narrative on 28 February, although they will need to admit that general inflation pressures have declined and the economy underperformed, making any promise of higher-for-longer a harder sell to markets.

The next key release in New Zealand is the 4Q jobs report on 6 February. Until then, expect volatile Chinese sentiment and USD dynamics to drive NZD performance. Even in the case of an RBNZ dovish shift, we like the chances of a higher NZD/USD beyond the short term as the Kiwi dollar benefits from a broader USD decline and Fed rate cuts. Our year-end target is 0.64.