Forex News: Falling Producer Prices May Dent Inflation Expectations, NZDUSD Flat 

THE TAKEAWAY: Producer prices decline > Falling prices may exert pressure on RBNZ to revise inflation expectations lower > NZDUSD flat

The New Zealand Dollar was little changed as prices producers paid for production inputs declined 1 percent while producer’s sales prices declined 0.9 percent in the third quarter signaling industrial economic activity may not have gained the level of pace the RBNZ expected to bring consumer price levels back up to the 1 to 3 percent medium term threshold levels. Interestingly, two year inflation expectations held by the central bank have fallen to 2.3 percent, down by 23 percent since reaching a peak in June 2011, which is still within their medium target range. Expectations may still have room for downward revision if gauges such as producer input and output prices continue to show signs of weakness. Moreover, the NZDUSD cross has declined by roughly 2 percent since June 2011 where price action began to technically trade within a large consolidation range.

The kiwi has held up relatively well against safe haven currencies like the greenaback as risk aversion has recently gripped the US equity markets since mid September. It’s unclear whether Forex traders will decide to play catch-up with risk aversion as measured by the S&P 500’s declines or if FX participants determine the yield is worth the risk of a significant move lower which may fundamentally align with soft CPI and production price figures. Currently, currency traders expect a 27 percent probability the RBNZ will reduce interest rates by 25 basis points on November 5. A cut may surprise markets and likely weigh heavily on the New Zealand Dollar.

NZD/USD, Daily Chart