The kiwi grinded higher this week, largely on USD weakness as the dollarcame under pressure following the Fed's decision to hold policy steadyand modestly softer US data. This weakness gathered additionalmomentum late in the week as the yen appreciated sharply, leavingmarkets to ponder whether Japanese authorities had intervened.AUD/NZD saw little movement over the same period, suggesting the Kiwi'sstrength was primarily driven by global factors.On the domestic front, it was a quiet week with only survey data onrelease. ANZ business confidence jumped 19 points to +56 in July, withexpected activity up 12 points to +49, though past activity rose just 1point to +10, leaving sentiment running well ahead of actual conditions.Inflation signals softened alongside this, with expectations easing to3.14% from 3.36%, cost expectations falling to 78 from 85, and pricingintentions dropping to a net 47%. ANZ noted that responses receivedlater in the month showed softer activity indicators alongside firmerinflation indicators.ANZ Roy Morgan consumer confidence also lifted, rising 8 points in Julyto 99.3, though the index remains 8 points below its January peakdespite sitting 19 points above its April low. The net proportion ofhouseholds who see it as a good time to buy a major household item rose4 points to -7, still subdued and suggestive of soft consumer spending inthe near term. Inflation expectations (2 years ahead) were flat at 4.6%,while house price expectations eased to 2.6% from 3.0%. ANZ flaggedthat developments in the Middle East will continue to weigh on bothbusiness and consumer confidence. Indeed, the key question will bewhether businesses and households adapt to the uncertainty over time,or whether it results in a more persistent hit to investment and spendingbeyond the direct impact of higher fuel pricesOverall, the data suggests the New Zealand economy is holding upreasonably well, though uncertainty remains elevated given theescalation between the US and Iran. This supports our view that theRBNZ will deliver one further hike this year at its September meeting,with just one more hike in February 2027 bringing the OCR to 3%.
Turning to the US, the Fed held rates as expected. That said, threemembers dissented in favour of a 25bp hike, a hawkish undercurrent thatbelied a largely unchanged statement, with the only real shift a technicaltweak to reserves wording. Chair Warsh's press conference read ascommitted rather than hawkish, reaffirming the Fed's inflation mandateand describing the Fed being in a period of watchful thinking, pledging toanchor expectations without overreacting to individual data points.Adding to the dovish tone, June core PCE rose just 0.1% MoM, below the0.2% consensus. The annual rate eased to 3.3% from 3.4%, while thethree month annualised rate slowed to 2.9%, a promising sign theinflation impulse is fading with little evidence of second round effectsfrom the Middle East conflict. The advance Q2 GDP estimate rose 1.5%SAAR, below the 2% consensus, though details were firmer than theheadline suggests, with consumption rising 3.2% after Q1's soft 0.5%gain and private investment staying robust at 7%. Growth broadenedbeyond AI-linked sectors, residential investment turned positive for thefirst time in eight quarters, and net exports detracted 1ppt from growth.We continue to expect a prolonged Fed pause through the remainder ofthe year, with Warsh likely to use words rather than action to anchorexpectations, taking a holistic view of the data rather than reacting toany single print. September could be a closer call if the Iran war persists,though we suspect it mirrors this meeting, a divided vote dressed inhawkish language but with no firm commitment to follow through.The US-Iran conflict continued in the background, despite a brief pauseafter reports the IRGC struck US bases in the Middle East, prompting USretaliatory attacks on Iranian military targets. Oil markets remainedlargely unfazed, with Brent falling steadily to a low of $84/bbl beforeending the week near $88/bbl, likely reflecting improving shipping flowsoffsetting the renewed tensions. Strait of Hormuz traffic recoveredtoward week's end, with 14 vessels crossing in both directions, up fromsingle digits the week before, while Bab al-Mandeb flows in the Red Seaalso held up better than feared, running only 50% below normal.Elsewhere, the Bank of England voted 6-3 to hold rates, a modesthawkish surprise after economists had braced for a 7-2 split, withCatherine Mann joining hawks Pill and Greene in dissenting. The CPIforecast was nudged lower, with inflation now seen peaking at 3.2% inQ4-26 from 3.25% previously, though the committee stands ready to actdepending on the scale of the Iran shock.The standout move, though, came from the yen, which strengthenedmore than 2% against the US dollar late in the week on reports of directFX intervention from Japanese authorities, their second such campaignthis year. The move was well timed, landing as the dollar was alreadyunder pressure from Warsh's dovish tone and the softer core PCE print.The BoJ's hold, as widely expected, drew little reaction, with the yenmove likely depending less on the Bank and more on the dollar toppingout more broadly, with a decisive turn in USD/JPY probably requiringsofter US data or a surprise hawkish shift from Tokyo.
