New Zealand Dollar extends run of gains ahead of inflation report

• A fifth consecutive session of gains takes NZD/USD marginally above 0.5700.
• The 28 October decision remains wide open, according to RBNZ Chief Economist Conway.
• At a forecast 3.8%, annual inflation would remain above the RBNZ's 1%-3% target range.

Due at 21:45 GMT on Wednesday, Stats NZ's third-quarter Consumer Price Index (CPI) precedes the Reserve Bank of New Zealand's (RBNZ) 28 October decision, with NZD/USD sitting just below its 50-day average. Five consecutive daily advances have lifted the pair to slightly above 0.5700, its strongest level since 23 September. Swap markets imply roughly an 80% probability of an increase in the Official Cash Rate (OCR) from 2.75% to 3.00%. The inflation figures could therefore cement expectations of a rise or bring them back into question.

Markets assign an 80% chance to a rate rise as Chief Economist Conway leaves the decision open

New Zealand's annual growth in card spending accelerated to 6.9% in September from 3.5% in August, providing the kind of evidence of stronger domestic spending that keeps a rate rise in contention. On Wednesday, the New Zealand Dollar ranked among the better-performing major currencies as the US Dollar weakened against most of its peers. Following RBNZ increases in July and on 2 September, a third rise to 3.00% would bring the OCR to within a percentage point of the midpoint of the Fed's 3.75%-4.00% range.

Although RBNZ Chief Economist Conway described the October decision as wide open, he said interest rates were most likely heading higher. The record of the 2 September increase to 2.75% showed that he and one other committee member considered inflation risks balanced; the remaining four judged them to be skewed to the upside. Thus, one of the committee's two members who previously saw balanced risks now regards higher rates as the most likely outcome.

Crude Oil prices and the exchange rate were also cited by Chief Economist Conway as upside inflation risks, linking the policy decision directly to NZD/USD. Since a weaker Kiwi makes everything New Zealand imports more expensive, the rally over five sessions has reduced one of the risks he identified.

Previous quarter's inflation exceeded the RBNZ forecast by two tenths

Forecasts put the quarterly increase in third-quarter CPI at 0.8%, down from 1.5%, while annual inflation is expected to slow from 4.1% to 3.8%. Against these figures, the RBNZ projects 0.8% and 3.9%, respectively. With a target range of 1%-3%, even an outcome in line with the market forecast would leave annual inflation 0.8 percentage points above the upper limit. The central bank anticipates a return to that range by mid-2027, followed by the 2% midpoint later that year.

Unless inflation comes in well below expectations, analysts anticipate a rate increase on 28 October. A third-quarter reading below the RBNZ's projection is possible, although second-quarter inflation reached 4.1%, exceeding its 3.9% forecast. An annual reading of 3.9% or higher would leave an increase almost fully priced into NZD/USD, with the nearby 50-day average overhead providing the first test. In the view of some analysts, the Kiwi is already undervalued relative to its short-term fair value.

Markets put the chance of a Fed rate rise by December at about 90%

US jobless claims are forecast at 200K, compared with the previous 199K, ahead of Thursday's release at 12:30 GMT. Friday brings S&P Global's preliminary US Purchasing Managers Index (PMI) figures at 13:45 GMT. Expectations are for manufacturing to ease from 55.9 to 55.6 and services from 58.8 to 57.9.

Fed futures indicate unchanged rates on 28 October and roughly a 90% probability of an increase by December. For the Kiwi, the significance lies in the two central banks adjusting the same interest-rate gap from opposite sides. An October RBNZ rise of a quarter-point would narrow the differential by a quarter-point, only for a December Fed increase of a quarter-point to restore the original gap. Consequently, US figures that strengthen the case for a December increase diminish the benefit to NZD/USD of an October RBNZ move.

New Zealand Dollar trades below its 50-day average as key levels come into focus

Resistance: Since early September, NZD/USD has traded below its 50-day Exponential Moving Average (EMA). Wednesday's high, slightly above 0.5700, fell just short of that average. The rebound on 22 September peaked at 0.5750, while the 18 September high lies just below 0.5800.

Support: At slightly above 0.5650, Wednesday's low remained higher than Tuesday's. The advance over five sessions began at 0.5600 on 15 October.

Bias: A long bias remains in place provided closing prices hold above 0.5650, with 0.5750 the first objective and 0.5800 the next. Having climbed to around 78, the daily Stochastic Relative Strength Index (Stoch RSI) is approaching overbought territory, leaving an extended rally exposed to a weaker-than-expected CPI reading. A daily close below 0.5600 invalidates the long position.

Daily chart of NZD/USD