Kiwi Dollar Near 3-Week Highs

The New Zealand dollar held around $0.576 on Monday, hovering near its highest level in more than three weeks, supported by expectations of further interest rate hikes from the Reserve Bank. Swaps traders are pricing in nearly two additional quarter-point rate hikes from the Reserve Bank of New Zealand by year-end, following the central bank’s hawkish stance and strong manufacturing data last week. Additional support came from fresh data showing that New Zealand’s services sector returned to expansion in June for the first time since January, reinforcing the view that the economy is regaining momentum. However, escalating tensions in the Middle East are weighing on risk sentiment and limiting the kiwi’s gains. The US and Iran exchanged heavy missile and drone strikes over the weekend, with Tehran targeting US facilities across the Gulf and claiming it had once again closed the Strait of Hormuz.

The New Zealand dollar edged up to around $0.576, the highest level in over three weeks, amid expectations of an additional rate hike following the Reserve Bank’s hawkish stance. The central bank raised its official cash rate on Wednesday for the first time in three years to tackle inflation pressures, adding that further tightening may be needed. The decision came as oil prices began rising again following renewed hostilities between the US and Iran, reinforcing the central bank’s concerns over inflation. Governor Anna Breman said elevated fuel prices remained the key upside risk to inflation, warning that if the conflict persists, inflation could become embedded. Markets now imply a 73% chance of a follow-up hike in September. Supporting the hawkish outlook, New Zealand’s manufacturing activity expanded at the fastest pace in almost five years in June, adding to signs of a pickup in economic growth. The kiwi has gained 0.9% this week, its second consecutive weekly advance.

The New Zealand dollar rose to around $0.569 after the Reserve Bank raised its cash rate by 25 bps to 2.50%, as expected, and signaled further rate hikes this year. The move marked the central bank’s first rate increase in more than three years, as policymakers sought to bring inflation back to target without causing unnecessary damage to economic activity. The RBNZ acknowledged that easing geopolitical tensions and the recent decline in energy prices had eased near-term inflation pressures, though it warned that the effects of the war would persist for some time and that the outlook for medium-term inflation remained uncertain. Also, the country's economic growth is expected to pick up in the third quarter after losing momentum in the second quarter due to the fuel shock. Most economists anticipate one or two additional rate hikes this year, while markets have almost fully priced in a move in October.