New Zealand Dollar Holds Firm

The New Zealand dollar hovered near six-week highs around $0.59 as investors continued to assess the Reserve Bank of New Zealand’s interest rate outlook. Higher-than-expected first-quarter inflation data released earlier this week prompted markets to increase bets that the central bank will raise the cash rate by 25 basis points in May, with the probability of a move now priced at over 50% from below 30% before the release. Inflationary pressures are expected to intensify further in the second quarter as the full impact of higher energy costs feeds through to the data. The RBNZ has recently warned that it would act decisively if inflation accelerates. However, many analysts still expect policymakers to hold rates steady in the near term, as the Middle East war threaten to undermine the country’s fragile economic recovery. Meanwhile, investors were also awaiting details on further peace talks between the US and Iran after President Trump said he would extend their ceasefire.

The New Zealand dollar rose to $0.591, its highest level in six weeks, as higher-than-expected inflation data reinforced the case for tighter monetary policy. Consumer prices increased 3.1% year-on-year in the first quarter, the same pace as in the prior quarter and exceeding forecasts of a 2.9% rise. The reading remained above the upper end of the RBNZ’s 1-3% target range. Price pressures are expected to intensify further in the second quarter as the full impact of higher energy costs feeds into the data, prompting speculation that the central bank may raise rates sooner than previously indicated. Traders now assign over a 50% chance of a May rate hike, up from below 30% a few days ago. However, there is some caution, as the economy is only beginning to recover from a prolonged downturn. Separate data showed business confidence slumped in the first quarter, with firms signaling plans to cut investment and reduce staffing as rising prices due to the Middle East war weighed on profits.

The New Zealand dollar slipped toward $0.587 on Monday, extending its retreat from an over five-week high as risk sentiment weakened amid renewed tensions between the US and Iran. Iran closed the Strait of Hormuz again on Saturday, just hours after reopening it, citing “repeated breaches of trust” by the US and the continuation of a US naval blockade on Iranian ports. Meanwhile, the latest domestic data showed softer food inflation and moderating consumer spending, reinforcing expectations that the Reserve Bank of New Zealand may keep interest rates unchanged for now. However, while price pressures are easing in some categories, underlying inflation remains a key concern, and the RBNZ has recently signaled that it is prepared to raise rates should core inflation accelerate. Attention now turns to the release of the first-quarter CPI reading for further clues on the monetary policy outlook.