New Zealand Dollar Holds Firm

The New Zealand dollar traded around $0.588 on Monday after rising to a more than two-month high in the previous session as a weak US jobs report sent the greenback lower. The US dollar hovered near a two-month low after a surprise contraction in the labour market in July reduced bets for a Federal Reserve rate hike in September, while investors awaited this week’s inflation data for further clues on the policy path. The kiwi dollar also continued to draw support from expectations that the Reserve Bank of New Zealand could raise interest rates next month after signalling at its latest meeting that further tightening may be required to remove monetary stimulus and bring inflation under control. However, last week’s soft jobs report raised fresh questions over how far the central bank will raise interest rates.

The New Zealand dollar slipped to around $0.586, easing further from a two-month high as risk sentiment weakened again amid renewed tensions in the Strait of Hormuz. Iranian state media reported on Thursday that naval forces had carried out an operation against “hostile targets” near the strait following explosions on Qeshm Island, raising concerns about the prospects for a full reopening of the key waterway. The kiwi was also pressured by softer-than-expected jobs report earlier this week, which reinforced the case that any further interest rate increases from the Reserve Bank of New Zealand would likely be gradual rather than aggressive. However, markets continued to price in a quarter-point rate hike in September after the central bank indicated at its latest meeting that further tightening may be needed to reduce monetary stimulus and bring inflation under control. The kiwi is down 0.3% so far this week.

The New Zealand dollar fell to around $0.586, retreating from a two-month high after a weaker-than-expected jobs report raised doubts about how high interest rates may rise this year. New Zealand's unemployment rate climbed to 5.6% in the second quarter, the highest level since the third quarter of 2015 and above the expected 5.4%, pointing to growing slack in the labor market. Although employment increased 0.5% from the previous quarter and outpaced forecasts of a 0.1% rise, the gain was partly offset by a sharp increase in the participation rate. Meanwhile, annual wage growth remained subdued at 2.0%, suggesting wage pressures are unlikely to fuel inflation and reducing the case for an aggressive tightening cycle. Still, markets continued to price in a September rate hike after the Reserve Bank of New Zealand signaled last month that further tightening would likely be needed to reduce monetary stimulus and keep inflation under control.