New Zealand Dollar extends winning streak ahead of inflation report

• 0.5700 cleared as NZD/USD extends gains into a fifth consecutive session.
• October 28 remains an open decision, says RBNZ Chief Economist Conway.
• 3.8% annual inflation forecast exceeds the RBNZ's 1%-3% target range.

NZD/USD is trading just above 0.5700. Five consecutive daily advances have taken it to its highest since September 23, just below its 50-day average. Stats NZ releases the third-quarter Consumer Price Index (CPI) at 21:45 GMT on Wednesday, ahead of the Reserve Bank of New Zealand (RBNZ) decision on October 28. With swaps assigning about an 80% probability to an Official Cash Rate (OCR) increase from 2.75% to 3.00%, the inflation figures could make a hike a certainty or reopen doubts.

80% hike probability contrasts with Conway's open October decision

A broadly softer US Dollar helped place the New Zealand Dollar among Wednesday's stronger major currencies. Domestic card spending increased 6.9% year on year in September, accelerating from 3.5% in August. Stronger spending supports the case for another rate rise. Following RBNZ increases in July and on September 2, a third hike would lift the OCR to 3.00%, within a 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 rates would most likely move higher. The record of the September 2 increase to 2.75% showed that he and one other committee member considered inflation risks balanced; the remaining four judged them skewed to the upside. One of those two previously balanced voices now sees a rate increase as the most likely direction.

Crude Oil prices and the exchange rate were also among the upside inflation risks identified by Chief Economist Conway, directly linking the policy decision to NZD/USD. When the Kiwi weakens, New Zealand pays more for everything it purchases overseas. Its five-session advance has therefore reduced one of the upside risks he highlighted.

Two tenths above projection: last quarter's RBNZ inflation miss

Annual inflation is expected to ease from 4.1% to 3.8%, while the quarterly CPI increase is forecast at 0.8%, down from 1.5%. The RBNZ projects quarterly inflation of 0.8% and an annual rate of 3.9%. Even a reading in line with the market forecast would leave annual inflation 0.8 points above the ceiling of its 1%-3% target band. The bank expects inflation to return to that band by mid-2027 and reach the 2% midpoint later that year.

Unless CPI falls substantially short of forecasts, analysts expect the RBNZ to raise rates on October 28. A third-quarter undershoot of the bank's projection remains possible, although second-quarter inflation reached 4.1% against its 3.9% estimate. An annual reading of 3.9% or higher would leave a hike almost fully priced into NZD/USD. The first test would then be the 50-day average immediately overhead. Some analysts already judge the Kiwi undervalued relative to its short-term fair value.

90% probability priced for a Fed hike by December

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

Futures imply unchanged Fed rates on October 28 and about a 90% probability of an increase by December. For the Kiwi, the significance is that the two central banks influence the same rate differential from opposite sides. An October RBNZ increase of a quarter-point would narrow the gap by a quarter-point; a December Fed rise of a quarter-point would restore the original gap. US figures that strengthen the case for a December hike consequently reduce the value of an October RBNZ increase for NZD/USD.

50-day average caps NZD/USD: key levels

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

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

Bias: The long bias remains valid while daily closes hold above 0.5650, with targets at 0.5750 followed by 0.5800. At about 78, the daily Stochastic Relative Strength Index (Stoch RSI) is approaching overbought territory. A CPI disappointment would therefore hit an already stretched advance. A daily close below 0.5600 invalidates the long position.

Daily NZD/USD price chart