New Zealand Dollar Holds Losses

The New Zealand dollar held its recent decline around $0.585 on Friday, as geopolitical uncertainty kept traders cautious. Prospects of continued US-Iran peace talks appeared uncertain despite an extension to a fragile ceasefire. Iran vowed it would not reopen the Strait of Hormuz while the US has maintained a blockade on vessels traveling to and from Iranian ports. On the policy front, investors increased bets that the Reserve Bank of New Zealand will raise the cash rate by 25 basis points in May following a hot inflation report for the first quarter. Inflationary pressures are also 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 keep rates unchanged in the near term, as the Middle East conflict threatens to undermine the country’s fragile economic recovery.

The New Zealand dollar dropped to $0.588 on Thursday, reversing the prior session’s gains, as investors continued to assess the Reserve Bank of New Zealand’s rate path. 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 bps 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.