Brown Brothers Harriman’s (BBH) Elias Haddad reports NZD/USD has rallied toward a seven-week high after New Zealand Q2 Consumer Price Index (CPI) surprised slightly on the upside versus consensus but came in just below the Reserve Bank of New Zealand's (RBNZ) projection. Above-target inflation and a stronger domestic growth outlook argue for additional RBNZ rate hikes, with the swaps curve pricing significant tightening toward the top of the neutral range, which Haddad sees as NZD supportive.

Inflation backdrop backs NZD

"NZD/USD rallied to near a seven-week high. New Zealand Q2 CPI was mixed. Headline CPI rose more than expected in Q2 but was marginally lower than the RBNZ projected in May."

"Headline CPI increased 1.5% q/q (consensus: 1.4%, RBNZ: 1.6%) vs. vs. 0.9% in Q1 driven by higher petrol prices. Year-over-year inflation quickened to 4.1% (consensus: 4.0%, RBNZ projection: 4.2%) vs. 3.1% in Q1. Core inflation (average of the sectoral factor model, factor model, and CPI ex. petrol prices) rose to the top of the RBNZ 1-3% target range."

"Above target inflation and a more favorable domestic growth outlook argue for additional RBNZ rate hikes which is NZD supportive. At its last July 8 meeting, the RBNZ raised the Official Cash rate (OCR) 25bps to 2.50% and indicated that “further OCR increases appear likely at upcoming meetings.”"

"The swaps curve price in 60bps hikes by year-end and a total of 100bps of tightening over the next twelve months to 3.50% - near the top of the RBNZ estimated neutral range (2.20%-4.10%)."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)