Kiwi hits two month high on USD weakness

The New Zealand dollar soared to its highest level since early June, reflecting broad based USD weakness on the back of softer US data. The the kiwi gave back some of its gains as US-Iran tensions worsened, before rallying strongly mid-week on news that the US Treasury would expand its long dated bond buyback program over the coming quarter.Domestically, the week's data was front loaded, with July's SPI, retail spending and the BusinessNZ PSI already covered in our mid-week update. In brief, the SPI came in weaker than expected, reinforcing the RBNZ's downward revision to its Q3 inflation forecast to 3.3% YoY in the July MPR, with softness evident even in more persistent components such as rents. Retail card spending told a firmer story, rebounding 1.3% MoM in July, though the broader trend remains subdued, with both total and core spending still sitting a touch below levels seen prior to the Middle East conflict. The BusinessNZ PSI eased to 50.6 from 50.9, still only the second month of expansion since December 2025, with sentiment among respondents notably weak.Q2 PPI data was released later in the week and came in a touch stronger than expected. Input prices rose 2.9% QoQ, the strongest quarterly pace since March 2025, taking annual growth to 4.1% from 1.8%, while output prices rose 1.6% QoQ, with annual growth lifting to 3.2% from 2.2%. Stats NZ noted that prices paid by producers for inputs such as fuel, power and raw materials rose faster than prices received for output over the quarter. The increase in input prices was driven largely by transport costs, with other petroleum products such as aviation fuel and lubricants up 34.9% QoQ and diesel prices rising 52.6%. On the output side, higher power prices did much of the work, with electricity prices charged to businesses up 21.8% over the quarter, against a 4.4% rise for residential consumers.For the RBNZ, the key question is whether these higher input costs continue to be passed through to output prices at an elevated rate. The pass through was prevalent in the June quarter, though not severe. However, this does not rule out further increases later in the year, a risk also flagged in recent NZ business surveys, where firms continue to expect further price rises ahead. Indeed, this supports our view that the RBNZ will continue its hiking cycle next month, before delivering one additional hike in early 2027 (in Feb-2027), bringing the OCR to 3%.Globally, it was a comparatively quiet week on the data front, with price action instead driven by US fiscal and monetary policy communication. Indeed, mid-week, US Treasury announced plans to expand its long dated bond buyback program, lifting purchases in the upcoming September to November refunding quarter from US$2bn to US$4bn, after a sharp sell off had pushed the 30-year Treasury yield to a 19-year high above 5.3%. The move is aimed at supporting liquidity at the long end of the curve, which has faced persistent selling pressure amid elevated geopolitical tensions and broader market uncertainty. Risk currencies, including both antipodean currencies, along with equities rallied, while bond yields fell following the announcement.The relief proved short lived, however, with yields resuming their advance and largely unwinding the initial move, as the episode served as a reminder of the underlying fiscal pressures still facing the US. Treasury Secretary Bessent's remarks that further fiscal announcements are coming, with a greater emphasis on consolidation, offered some reassurance, though measures such as increased T-bill issuance are likely to ease funding pressures only at the margin, with genuine fiscal consolidation still seen as necessary over the longer term.The Fed also released minutes from its July meeting, which showed inflation concerns deepening among policymakers even as the committee held its policy rate steady in the 3.50 to 3.75% range. Three members dissented in favour of a hike at that meeting, and minutes showed a broader group of participants judging that further tightening would likely be needed should inflation fail to decline toward target, with price pressures seen as broad based. There was no mention of support for a rate cut, underscoring how far the Fed's policy debate has shifted from expectations at the start of the year that easing would be underway by now. Markets took little from the minutes itself, with attention instead centred on the Treasury's buyback announcement prior to the release, though markets continue to fully price  a hike by the end of the year.Elsewhere, UK inflation for July was also released. Headline CPI rose to 2.9% YoY in July (from 2.6% prior), though this was largely driven by a 13% increase in Ofgem's energy price cap that pushed housing and household services inflation up. More importantly for the BoE, core inflation held steady at 2.6%, which was more encouraging.In the Middle East, oil prices continued to climb higher, with Brent climbing to its highest level in almost a month as the US moved to ratchet up economic pressure on Iran. President Trump announced fresh measures threatening consequences for countries doing business with Iran, though details remain unclear and are unlikely to extend to Iran's oil sales given the risk of confrontation with China ahead of Trump's planned meeting with President Xi next month. Hopes for a near term reopening of the Strait of Hormuz have faded, with Iran's continued control, alongside the US blockade of Iranian ports, likely to keep flows constrained for some time. Iran's central bank governor said this week that oil exports have virtually ground to a halt.