New Zealand Dollar Holds Near 6-Week High

The New Zealand dollar steadied at 0.582, remaining near a six-week high, supported by growing expectations of further interest rate increases following a hot inflation reading. New Zealand’s annual inflation accelerated to 4.1% in Q2 from 3.1% in Q1, exceeding both market forecasts of 4% and the RBNZ's projection of 3.9%. It marked the highest level since Q4 2023 and pushed inflation further above the central bank’s 1–3% target range. The hot print solidified wagers that the central bank will deliver another 25-basis-point rate hike in September, with swaps also implying additional increases in either October or December, followed by another move in February next year. Last week, RBNZ Chief Economist Paul Conway said that Middle East-driven inflation risks to the third quarter outlook have increased, and that some further reduction in monetary stimulus is likely to be needed.

The New Zealand dollar rose to $0.586, approaching a seven-week high, as higher-than-expected inflation data cemented bets on another rate hike in September. Annual inflation accelerated to 4.1% in the second quarter from 3.1% in the previous quarter, exceeding both market forecasts of 4% and the RBNZ's projection of 3.9%. It marked the highest level since the fourth quarter of 2023 and was well above the central bank's 1-3% target band. Swaps also imply additional rate increases in either October or December, followed by another move in February next year. Earlier this month, the RBNZ raised the official cash rate for the first time in over three years and signaled that further tightening would likely be needed to return inflation to its target as the economy continues to recover. Rate-hike expectations have continued to underpin the kiwi, helping it outperform many of its peers despite a deterioration in global risk sentiment caused by escalating tensions between the US and Iran.

The New Zealand dollar edged up to $0.585, the highest in more than six weeks, underpinned by a hawkish domestic interest rate outlook, while investors await the CPI report. New Zealand's annual inflation is expected to reach or even exceed 4% in the second quarter, which would mark its highest level in more than two years, largely driven by higher fuel prices. A higher-than-expected reading would reinforce the case for the RBNZ to raise the official cash rate to 3% by year-end. Markets are currently pricing in a 78% chance of a follow-up rate hike in September, with rates expected to peak at 3.5% by the middle of next year. The prospect of further rate increases at home has continued to support the kiwi, allowing it to outperform even as escalating tensions in the Middle East have dampened global risk appetite. The US conducted its ninth consecutive night of strikes against Iran while Tehran hit targets across the region.