New Zealand Dollar Rebounds from 2-Week Low

The New Zealand dollar rose to $0.586, rebounding from a two-week low, as traders continued to price in an RBNZ rate hike next month. The central bank has repeatedly stressed the need to withdraw some of its policy support, keeping expectations for another rate increase firmly in place. However, soft economic data this week raised fresh questions over the extent to which the RBNZ may continue tightening policy. New Zealand’s manufacturing PMI fell to 54.3 in July from 60.1 in June, with a majority of business comments turning negative. This followed data showing that one-year inflation expectations fell to 2.6% in Q3 from 3.4% in Q2, while the two-year measure, which the RBNZ watches most closely, eased to 2.3% from 2.5%. This suggests that inflation expectations remain contained and that there is a lower risk of higher oil prices spilling over into broader inflation. Despite the rebound, the kiwi is down 0.5% this week, following two consecutive weeks of gains.

The New Zealand dollar dropped to $0.585, its lowest in two weeks, as a decline in inflation expectations raised doubts about how far the Reserve Bank will need to go in its tightening cycle. Two-year inflation expectations, a key timeframe for monitoring how RBNZ monetary policy filters through to prices, fell to 2.3% in Q3 from 2.5% in Q2, while one-year inflation expectations fell to 2.6% from 3.4%, indicating that expectations remain anchored. Still, the central bank is widely expected to raise interest rates again in September after signaling the need to make policy less accommodative. Also pressuring the kiwi, the greenback firmed despite a subdued US inflation report, which reduced the likelihood of policy tightening by the Federal Reserve next month. Investors also remained cautious as talks between the US and Iran appeared to have reached an impasse, with both sides hardening their positions, while President Donald Trump said the US has “total control” over Hormuz.

The New Zealand dollar slipped to around $0.586 as the US dollar edged higher, with investors awaiting US inflation data for fresh clues on the Federal Reserve’s interest-rate path. A hotter-than-expected CPI reading could reinforce expectations for tighter US monetary policy, boosting the greenback. On the domestic front, markets remain set on a rate increase from the Reserve Bank of New Zealand in September after the central bank signalled that further tightening may be needed to remove monetary stimulus and keep inflation under control. However, last week’s soft jobs data has raised questions about how aggressively the RBNZ can continue raising rates. Meanwhile, uncertainty over the prospects for a Middle East peace deal that could reopen the Strait of Hormuz weighed on market confidence. In other news, NZ Prime Minister Christopher Luxon retained his position after a leadership vote among lawmakers from his own party, less than three months before the election.