NZD/CAD Ponders Swing Low Ahead of BoC, RBNZ as Hike Bets Firm

NZD/CAD is showing signs of a potential swing low ahead of the RBNZ and Bank of Canada's interest-rate decisions on 28 October. While New Zealand's headline inflation undershot expectations, accelerating underlying pressures have reinforced expectations for another RBNZ hike.

Meanwhile, softer Canadian CPI gives the BoC room to hold rates, although rising inflation expectations complicate its outlook. With an RBNZ hike almost fully priced in, relative central bank guidance could prove pivotal for NZD/CAD's next move.

NZD/CAD Rebound Potential Hinges on RBNZ and BoC Policy Signals

New Zealand's Underlying Inflation Supports Further RBNZ Tightening

New Zealand inflation eased to 3.7% y/y in Q3 from 4.1%, undershooting market expectations of 3.8% and the RBNZ's 3.9% forecast. Quarterly CPI also undershot at 0.7%, while tradables inflation eased to 4.3% from 4.9%. However, underlying pressures strengthened. Stats NZ's measure excluding food, household energy and vehicle fuels accelerated to 1.1% q/q from 0.4%, pushing its annual rate to 2.9% from 2.5%. This divergence helps explain the kiwi's resilience despite softer headline figures, as underlying inflation remains a concern for the RBNZ.

Money markets continue to price a 98% probability of a 25bp RBNZ hike on 28 October, taking the cash rate to 3%, with a further 25bp priced by February. Yet the economic recovery remains uneven. September's manufacturing PMI accelerated to 56.5, while the larger services sector barely expanded at 50.9. This leaves the RBNZ balancing persistent inflation against a fragile recovery. With next week's hike almost fully priced in, the bigger question is whether policymakers signal further tightening. And with the Bank of Canada also announcing its decision next week, the relative policy outlook could be particularly important for NZD/CAD, which is showing signs of a potential swing low.

Source: LSEG

 

Bank of Canada Faces Conflicting Inflation Signals

The Bank of Canada also meets on 28 October, setting up a potential policy divergence with the RBNZ. Canada's September CPI undershot expectations at 3.1% y/y, while trimmed mean inflation eased to 1.84%, giving the BoC room to hold rates at 2.25%.

However, inflation expectations complicate the outlook. The BoC's Business Outlook Survey shows 41% of firms expect inflation above 3% over the next two years, up sharply from 11% in Q1. Five-year consumer inflation expectations also rose to 3.9% from 3.4%. This could limit the BoC's willingness to signal a dovish outlook, despite softer CPI.

With an RBNZ hike almost fully priced in, relative central bank guidance could be pivotal for NZD/CAD, particularly if the pair is forming a swing low.

NZD/CAD Technical Analysis: New Zealand Dollar vs Canadian Dollar

The Kiwi-CAD cross can be choppy for extended periods, but when it trends, it can deliver moves of 300–400 pips or more. NZD/CAD has fallen over 300 pips in the past 10 weeks – much of it during the first five – and is now consolidating near its swing lows. This has piqued my interest for a potential technical swing low.

Of course, NZD/CAD requires a policy divergence between the RBNZ and BoC to help drive a sustained reversal. But from a technical perspective, the upside offers a more attractive reward-to-risk profile than the downside at current levels.

The weekly chart shows three long-legged dojis holding above 0.7950, though for now bulls are struggling to keep prices above 0.80. Perhaps we’re seeing quiet accumulation from bulls – a similar scenario I suspect is happening with gold. A bullish RSI (2) divergence ahs also formed in the oversold level.

While the daily chart lacks convincing bullish momentum, the NZ-CA 2-year spread is rising ahead of prices, hinting at a potential rebound ahead for NZD/CAD. Note that the 200-day SMA sits just beneath 0.81 – a mere 100-pips from current prices, which does not seem far for a currency pair capable of moves in excess of 300-pips.

Source: ICE, TradingView