New Zealand Dollar heads into inflation report with winning streak intact

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

NZD/USD is trading just above 0.5700, its strongest level since September 23, following five consecutive daily advances. The pair remains just below its 50-day average ahead of Stats NZ's third-quarter Consumer Price Index (CPI), due at 21:45 GMT on Wednesday, and the Reserve Bank of New Zealand's (RBNZ) October 28 decision. With swaps implying about an 80% probability of an increase in the Official Cash Rate (OCR) from 2.75% to 3.00%, the inflation release could either make a hike certain or cast fresh doubt on it.

Is an 80% hike probability justified when Chief Economist Conway sees an open decision?

The New Zealand Dollar ranked among Wednesday's stronger major currencies as the US Dollar weakened against most of its peers. Supporting the case for a rate increase, New Zealand's annual card spending growth accelerated to 6.9% in September from 3.5% in August. After RBNZ hikes in July and on September 2, a third increase to 3.00% would bring the OCR within a point of the midpoint of the Fed's 3.75%-4.00% range.

While describing the October decision as wide open, RBNZ Chief Economist Conway said interest rates were most likely heading higher. The record of the September 2 increase to 2.75% shows that he was among two committee members who judged inflation risks to be balanced; the remaining four considered them skewed to the upside. Rates are now most likely to rise, according to one of those two members who previously viewed the risks as balanced.

The exchange rate and Crude Oil prices were also identified as upside inflation risks by Chief Economist Conway, directly linking the policy decision to NZD/USD. Because a softer Kiwi makes everything New Zealand imports more expensive, the currency's five-session advance has reduced one of the upside risks he highlighted.

Will CPI surprise again after last quarter's two-tenths overshoot of the RBNZ forecast?

An easing in annual inflation from 4.1% to 3.8% is forecast for the third quarter, alongside a quarterly CPI increase of 0.8%, down from 1.5%. The RBNZ projects quarterly and annual readings of 0.8% and 3.9%, respectively. With its target band at 1%-3%, even an outcome matching the market forecast would put annual inflation 0.8 points above the upper limit. The central bank expects inflation to return within the band by mid-2027 before reaching the 2% midpoint later that year.

For NZD/USD, annual inflation of 3.9% or higher would leave a rate increase almost fully priced in, with the nearby 50-day average overhead providing the first test. Analysts anticipate an October 28 hike unless the data comes in well below expectations. Although third-quarter inflation could undershoot the RBNZ's projection, the second-quarter reading of 4.1% exceeded its 3.9% forecast. Some analysts already consider the Kiwi undervalued relative to its short-term fair value.

What does a roughly 90% chance of a Fed hike by December mean for the Kiwi?

US jobless claims are forecast at 200K, compared with the previous 199K, ahead of Thursday's release at 12:30 GMT. On Friday at 13:45 GMT, S&P Global will publish its preliminary US Purchasing Managers Index (PMI) readings. Manufacturing is expected to ease from 55.9 to 55.6, while services are forecast at 57.9, down from 58.8.

For the Kiwi, the two central banks influence the same interest-rate gap from opposite sides. Fed futures indicate unchanged rates on October 28 and around a 90% probability of an increase by December. If the RBNZ raises rates by a quarter-point in October, the gap narrows by that amount; a quarter-point Fed increase in December would restore the original gap. Consequently, US figures that strengthen the case for a December hike reduce the benefit of an October RBNZ increase for NZD/USD.

Which NZD/USD levels matter below the 50-day average?

Resistance: Wednesday's high, a little above 0.5700, fell just short of the 50-day Exponential Moving Average (EMA), below which NZD/USD has traded since early September. The September 22 rebound stalled at 0.5750, while the September 18 peak lies just below 0.5800.

Support: The five-session advance began at 0.5600 on October 15. Closer to current prices, Wednesday's low just above 0.5650 remained higher than Tuesday's low.

Bias: A long bias remains in place as long as closing prices hold above 0.5650, with 0.5750 followed by 0.5800 as the objectives. At about 78 and moving towards overbought territory, the daily Stochastic Relative Strength Index (Stoch RSI) suggests a CPI undershoot would hit an already extended rally. A daily close below 0.5600 would end the long position.

Daily chart of NZD/USD