New Zealand Dollar Holds Decline

The New Zealand dollar traded around $0.581 after two consecutive sessions of losses, as traders assessed the impact of persistent Middle East tensions on the country's inflation outlook and broader economic prospects. The US and Iran continued to exchange strikes, while Yemen’s Houthi militants said they had attacked two Saudi Arabian tankers in the Red Sea, driving oil prices sharply higher. While the conflict has heightened inflation concerns, it has also put downside risks on the economy, as New Zealand remains heavily dependent on oil imports from the Middle East, leaving the kiwi vulnerable to supply disruptions and higher energy costs. Still, the Reserve Bank of New Zealand is widely expected to deliver another 25-basis-point rate hike in September following higher-than-expected inflation in the second quarter, with rates seen reaching at least 3.0% by year-end and peak at 3.5% around the middle of next year.

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.