The New Zealand dollar ended the week lower, unwinding early gains asbroader risk sentiment took over. The kiwi firmed initially on a strongerthan expected Q2 CPI print, but gave up the move over the back half ofthe week as the US-Iran conflict deepened and Brent crude pushed totwo month highs, dragging the currency lower.Tuesday's CPI release was the key domestic event. Headline inflationrose 1.5% QoQ, above our 1.4% forecast and in line with the marketmedian, lifting the annual rate to 4.1%, the highest in over two years andabove consensus of 4.0%. Transport was the largest contributor to thequarterly move, largely due to fuel prices spiking on the back of the Iranconflict. Outside of transport, housing and household utilities rose 1.1%,driven by higher household energy prices and home ownership costs. Non-tradable (domestic) inflation showed some signs of easing, withthe annual rate slowing modestly to 3.4% (from 3.5%), with quarterlyannualised growth slowing to its lowest pace since mid 2020,suggesting domestic price pressures may be starting to cool. Tradableinflation, however, rose sharply to 4.9% from 2.5%, largely on the fueldriven spike. Positively for the RBNZ, core measures also remainedrelatively contained, with CPI excluding fuel slowing to 2.9% from 3.2%.In our view, this should offer the RBNZ some comfort even as theheadline surprised to the upside. Looking ahead, we expect headline inflation to ease to 3.5% by end2026 as the fuel spike fades and the non-tradable trend continues tosoften, though risks remain skewed to the upside given ongoinggeopolitical tensions and their potential to keep oil prices elevated forlonger than we expect. On balance, the underlying inflation storysupports view of just one more RBNZ hike this year in September, with afurther move in February 2027 taking the OCR to 3.0%.Interestingly, market pricing for the OCR barely moved on the release,with 59bps of hikes still priced by year end, largely unchanged frombefore the data. Indeed, markets are pricing a 92% probability of a ratehike at the RBNZ’s next meeting in September. On the Middle East, oil prices rose to a two month high as the conflictbetween the US and Iran continued to broaden in scope and geographyrather than showing any signs of resolution. Brent crude pricesbreached US$100/bbl after Houthi militants attacked two Saudi oiltankers in the Red Sea, a route Saudi Arabia has increasingly relied onsince the Strait of Hormuz closure. President Trump threatened tointensify strikes on Iran and hold it responsible for further Houthiattacks, following almost two weeks of US strikes since Iran’s renewedaction in the Strait of Hormuz. With no negotiations underway, furtherdisruption to oil supply looks likely, and continues to be the dominantswing factor for NZD sentiment heading into next week
Kiwi feels the brunt of the Middle East conflict
