NZ inflation data looms as Australia, NZ dollars fluctuate

The Australian and New Zealand dollars faced volatility on Monday amid rising tensions in the Middle East and anticipation of key inflation data from New Zealand. The Australian dollar reached a four-day low of US$0.6960 before recovering slightly to US$0.6988, a 0.1% increase. This followed a 0.5% gain last week, with resistance noted at US$0.7021. The New Zealand dollar also dipped to an intraday low of US$0.5827 but stabilized at US$0.5844, maintaining a 1.4% increase from the previous week due to a hawkish outlook for domestic interest rates.

Market Context

The fluctuations in the currencies were influenced by ongoing military actions in the Middle East, where the US has conducted strikes against Iran for nine consecutive days. This geopolitical tension contributed to a 3% rise in Brent crude oil prices, surpassing US$90 per barrel for the first time in over a month. The Reserve Bank of New Zealand (RBNZ) has indicated potential rate hikes, having raised its policy rate to 2.5% earlier this month. Investors are particularly focused on inflation data set to be released on Tuesday, which is expected to show a rise in consumer inflation to 4% in the second quarter from 3.1% previously.

Inflation Data Impact

The upcoming inflation report is critical for determining the RBNZ's monetary policy trajectory. Analysts suggest that a lower inflation print could allow the central bank more flexibility, potentially limiting rate hikes to one more this year instead of two. Conversely, a higher inflation figure would likely reinforce the case for increasing rates to 3% by year-end. Jarrod Kerr, chief economist at Kiwibank, noted,

A higher inflation print will give them steam to hike to 3% by the end of the year.