Opinion: NZ$ to get boost if December CPI is higher than expected

By Danica Hampton NZD/USD is pretty much sitting exactly where it was this time yesterday morning (around 0.7390). However, it would be wrong to think there wasn't much going on last night. Yesterday's actions from the PBOC implicitly reaffirmed its commitment to tightening liquidity to cool bank lending. At its regular open market operations the PBOC lifted the auction yield of its 1-year bills for the second week in a row. China's actions weighed a bit on Asian equities and knocked some of the steam out of growth sensitive currencies like the NZD and AUD. Against a generally firmer USD, NZD/USD sank below 0.7340. Both the EUR and JPY lost a lot of ground to the USD last night, albeit for different reasons. EUR was weighed down by fears about Greece's solvency and a woeful German ZEW business confidence survey. USD/JPY pushed higher after news Japan Airlines was filing for bankruptcy protection triggered speculation it would be forced to close out its fuel hedging. Against this backdrop, NZD/EUR climbed about 1% to 0.5180 "“ its highest level since March 2008. NZD/JPY also gained about 1% from sub-66.70 to around 67.40. Solid demand for NZD crosses helped NZD/USD rebound back towards 0.7400. Today's CPI has the potential to surprise on the upside. The RBNZ is expecting a relatively soft -0.2% q/q. We're expecting a 0.1% rise, which would set annual inflation at 2.2%. We suspect anything above +0.2% would see market pricing shift to fully price the first RBNZ hike by March this year (current pricing is consistent with about a 40% chance of a 25bps hike in March), which would provide a clear boost to NZD/USD. For today, in the absence of a major CPI surprise, expect NZD/USD to remain within familiar ranges. We suspect dips will be limited to around 0.7360. On the topside, expect headwinds ahead of 0.7440. The USD finished the night firmer on a trade-weighted basis. However, most of the gains were seen against the EUR and JPY. GBP managed to hold its ground. EUR fell the hardest last night; EUR/USD fell from above 1.4400 to below 1.4260. Lingering concerns about sovereign solvency in Europe and a woeful German ZEW business confidence survey took a toll on EUR. The German ZEW economic sentiment index fell for the fourth straight month in January to 47.2, well below the 50.0 forecast. The separate gauge of current conditions also deteriorated, falling to -56.6 from December's -60.6. In contrast, the news out of the UK was upbeat. CPI surprised on the upside rising 0.6%m/m in December, bringing annual CPI to 2.9% (well above the 2.6% forecast). Kraft also finalised a deal to buy British candy maker Cadbury for about £11.9b, which provided an additional boost for GBP. GBP/USD was squeezed briefly above 1.6450 (although it's subsequently eased off its highs) and EUR/GBP fell from above 0.8800 to below 0.8720. Further clues on the UK economy will come from tonight's Bank of England Minutes and the UK employment figures. USD/JPY climbed from sub-90.40 to above 91.20 last night. News that Japan Airlines (JAL) would file for bankruptcy protection triggered speculation that it would be forced to close out ¥40b worth of fuel hedging, which has tended to underpin USD/JPY. The Bank of Canada left rates unchanged at 0.25% last night and repeated its commitment to keep rates steady until Q2. The accompanying statement sounded a little more upbeat on the global outlook, but highlighted that the strong CAD was a risk to the Canadian recovery. A week after raising bank reserve ratio requirements, the PBOC lifted the auction yield on 1-year bills in its regular open market operation for a second week in a row. The auction result simply confirms the PBOC is serious about tightening liquidity in order to cool the surge in bank lending. The Chinese decision weighed on Asian equities "“ the Shanghai index eased off its highs and closed up 0.3% and the Nikkei fell 0.8%. Despite a lacklustre Q4 earnings result from Citigroup, US equity markets have posted solid gains. Citigroup posted a US$7.6b quarterly loss (around 0.33 cents per share). Healthcare stocks led Wall Street higher, boosted by speculation that a Senate race in Massachusetts (for Edward Kennedy's currently democratic spot) could derail President Obama's health care reform plans. The S&P500 is currently up 0.95%. * Danica Hampton is BNZ's Senior Currency Strategist. All of the research produced by the BNZ Capital team of economists is available here.