The New Zealand dollar rallied to a three-week high on 16 February helped by better than expected retail sales data, and with that the currency has reversed most of its losses suffered after the Q4 inflation data.
The NZD/USD rose to 0.7528, its highest since 23 January, and up more than 0.7% on the day.
Retail sales in New Zealand grew 1.7% on a quarterly basis in the three months to December, up from 1.6% in the previous quarter and against the market expectation of 1.25%.
Sales excluding automobiles rose 1.5% after the Q3 rate was revised to the same reading from 1.4% previously.
The market is now waiting for the inflation expectations survey by the Reserve Bank of New Zealand next week.
The kiwi dollar had broken below the 0.7600 support on 20 January after the fourth quarter inflation data surprised on the dovish side, and had fallen about 6% to the February low of 0.7174 before the latest rebound.
The NZ consumer price inflation has fallen to 0.8% in the fourth quarter from 1% in the previous quarter while analysts had been expecting a softer fall to 0.9%.
Off the early February trough, the pair has strengthened nearly 5%, reversing most of the post-inflation losses.
The Kiwi dollar continued upward through the past three weeks despite the unemployment rate rising unexpectedly in Q4 to 5.7% as the employment change data was a positive 1.2% job addition when analysts had been expecting a repeat of 0.8%.
The RBNZ had left the policy rate unchanged at 3.5% at the 28 January review citing an above 3% GDP growth even while acknowledging downside risks to inflation.
The central bank had continued to lament the NZ dollar had been fundamentally strong despite the near 20% decline in the currency since July last year to the February low thanks to the big slide in commodity prices since June.
"While the New Zealand dollar has eased recently, we believe the exchange rate remains unjustified in terms of current economic conditions, particularly export prices, and unsustainable in terms of New Zealand's long-term economic fundamentals. We expect to see a further significant depreciation," RBNZ Governor Graeme Wheeler said.
A RBNZ survey last month predicted a 2.1% CPI for New Zealand in the two-year horizon.
Ahead of the 24 February release, fourth quarter factory gate inflation and GDT price index are due and may have an impact on the local dollar.