The Reserve Bank of New Zealand’s inflation model shows a year-over-year rate of 2.8%, down slightly from 2.9%. The official Consumer Price Index (CPI) data revealed a Q2 increase of 0.5% from the previous quarter, which is less than the predicted 0.6%. Moreover, the CPI showed a year-over-year rise of 2.7%, below the expected 2.8%. This lower CPI figure suggests another possible rate cut by the Reserve Bank of New Zealand (RBNZ).

Impact On New Zealand Dollar

The decreased tradeable inflation, as seen in the data, adds support for a potential rate change. Consequently, the New Zealand Dollar (NZD) has been negatively impacted by these lower inflation results. We think that these disappointing inflation numbers strengthen the case for a central bank interest rate cut soon. With the 2.7% year-over-year consumer price increase now sitting comfortably within the bank’s 1-3% target range, there’s less need to keep rates high. This downward trend in inflation, particularly in tradeable goods, opens a path for policymakers to relax their approach. Current market data from overnight index swaps shows over an 80% chance of a rate cut at the November policy meeting, a notable increase since before the recent data release. This aligns with recent signs indicating New Zealand entered a technical recession earlier this year, putting more pressure on the bank to encourage growth. We see the New Zealand Dollar likely moving downward against its major trading partners.

Trading Strategies And Opportunities

For derivative traders, we suggest buying put options on the NZD/USD. This strategy allows you to benefit from a potential decline while keeping risk clearly defined and limited. We recommend targeting expiry dates for these options just after the upcoming August and October policy meetings to capture any price changes resulting from dovish announcements. In past rate-cutting cycles, the NZD has often weakened significantly; for instance, during the 2019 cuts, it dropped over 5% in the months following the initial reduction. Traders can also consider short positions in NZD futures contracts to speculate directly on a decline. This situation contrasts sharply with the United States, where the Federal Reserve is keeping rates higher for longer. The opportunity appears even greater when trading the NZD against the Australian dollar. With Australia’s inflation remaining stubborn, the Reserve Bank of Australia is likely to cut rates much later than New Zealand. This widening interest rate gap makes shorting the NZD/AUD position attractive in the upcoming weeks. We expect implied volatility for the currency to rise as the next policy decision approaches. Selling out-of-the-money call option spreads on the NZD is a good strategy to benefit from this increased volatility. This strategy can generate income if the currency remains stable or declines, aligning with our overall bearish outlook. Create your live VT Markets account and start trading now.

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