New Zealand dollar falls as benign inflation boosts rate cut bets

Business Recorder

5 days ago

SYDNEY: The New Zealand dollar slipped on Monday while local bonds rallied after inflation data proved not as bad as feared, with still tepid domestic price pressures adding to the case for a cut in interest rates next month.
The kiwi dollar fell 0.3% to $0.5941, having lost 0.8% last week to mark a third consecutive week of declines. It is now off almost 3% from a nine-month peak of $0.6120, with near-term support now at last week's low of $0.5906.
Data on Monday showed New Zealand's inflation picked up to an annual rate of 2.7% in the second quarter, the highest level in a year, thanks to higher food, electricity and streaming services prices.
However, that came under the forecast of 2.8%. Non-tradable inflation, mostly domestically generated price pressures, continued to slow to 3.7% from 4% previously.
'CPI inflation has failed to significantly increase, providing the (Reserve Bank of New Zealand's Monetary Policy Committee) with reason not to expect a return of yearly CPI back to the top of the target band (of 1-3%) this year,' said Citi analysts in a note to clients.
'This would allow the MPC to re-start the easing cycle at the August 20 meeting.'
Two-year swap rates duly fell 6 basis points to 3.115%, the lowest since mid-May. Ten-year government bond yields dropped 4 bps to 4.595%.
Markets are now pricing in a 75% probability the RBNZ will cut by 25 basis points in August, up from a 61% chance ahead of the data.
The Aussie, on the other hand, was flat at $0.6510 , having lost 1% last week to as low as $0.6455. It is finding some support at 65 cents.
Against the Japanese yen, it slipped 0.3% to 96.61 yen as the Japanese currency bounced a little after the ruling coalition lost control of the upper house in an election on Sunday, a result that has been well flagged by polls.
Looking ahead, the Reserve Bank of Australia will release the minutes of its July policy meeting where it may offer some insights into a rare split among policymakers before deciding to hold rates steady at 3.85%.
A surprisingly soft jobs report last week has seen markets move to price a 90% chance that the RBA will cut rates in August.
Governor Michele Bullock is due to give a speech at an annual fundraising lunch at the Anika Foundation on Thursday.
Across the Tasman Sea, RBNZ Chief Economist Paul Conway will be speaking about the economic effects of tariffs in New Zealand on Thursday at 11:30am local time.