NZD: 4Q NZ CPI to set the RBNZ policy tone – ING

New Zealand 4Q CPI data (Wed) will be the first major domestic data release of the year - and is likely to set the tone for RBNZ policy sentiment (at least in the short-run), according to analysts at ING.

Key Quotes

“Market consensus is for headline inflation to remain at 1.9% YoY (0.4% QoQ) - which would still technically be below the 2% midpoint of the RBNZ's 1-3% target range. Even in the case of a positive CPI surprise, the general expectation is that the RBNZ will have some tolerance for inflation to head towards the higher-end of the target range - not least given the structurally low price dynamics that have plagued the DM world in recent years.”

“Add to this some uncertainty over what a shift to a dual mandate actually means for the RBNZ's policy reaction function - and it's unlikely that markets will be any rush to bring forward their expectations for the first rate hike in New Zealand this week. But we do see upside risks - given that there is only currently a 70% probability of a 2018 hike priced into the NZD OIS curve. That seems a bit low to us - and we expect a positive re-pricing at some point over the coming months - potentially in the build-up to the March RBNZ meeting. Domestic data, however, will do the heavy-lifting here. Look for NZD/USD to face strong resistance around the 0.7350-0.7400 area in the absence of any further USD weakness.”