The Kiwi sold off sharply midweek despite the RBNZ raising the OCR, as markets found the updated forecasts in its MPS underwhelming. The currency found some late-week support from broad US dollar weakness ahead of the NFP release. However, following the release, the Kiwi dropped sharply on the stronger-than-expected payrolls print, before paring most of the losses on comments from President Trump.Locally, the key focus was the RBNZ decision, where the MPC hiked the OCR by 25bp to 2.75%, as widely expected, with the decision reached by consensus. The RBNZ attributed the Q2 CPI overshoot (4.1% YoY,against its revised 3.9% forecast, down from 4.2% in the May MPS) to conflict-driven fuel prices, while noting core inflation, wage growth, and inflation expectations remain consistent with a return to the 1-3% target band by mid-2027, and to the 2% midpoint later that year.With the hike itself widely expected, markets instead focused on the updated projections in the accompanying MPS. The OCR track was left broadly unchanged from May, continuing to signal a terminal rate of~3.3% by mid-2029, in line with what we flagged in our preview. Near term inflation forecasts were revised down as expected, with headline inflation now seen easing to 3.9% by end-2026 (from 4.1% previously),while the unemployment rate forecast was nudged up modestly, to 5.5%by year-end. On growth, the RBNZ lifted its near-term GDP outlook slightly, though this was revised lower through 2027 relative to its May forecast, before converging back by decade's end.Looking ahead, we continue to see current market pricing of the OCR reaching 3.5% by 2H 2027 as overdone. Despite a firmer near-term inflation profile, the RBNZ's own projections show little additional hawkishness baked into the track, reinforcing our view that the terminal rate lands closer to 3%, most likely by February 2027, with some risk that this is pulled forward to end-2026 depending on incoming data.
US non-farm payrolls rose a net 162k in August, well above the 55k consensus, with June and July revised up a combined 55k, while the unemployment rate held steady at 4.1%. Markets now price a 60% chance of a September Fed hike, a view we remain skeptical of, though the data bolsters the hawks' case. The release was quickly followed by comments from President Trump, who praised the report while threatening to halttrade with deficit countries unless the Fed cuts rates.Additionally, US ISM surveys for August were also released last week,and suggested some mixed signals around US activity. Manufacturing PMI eased to 54.6 (from July's near four-year high of 55.6), although it continued to run for an eighth straight month of expansion. That said,new orders and employment both slowed, and price pressures still remain elevated. Services PMI surprised higher, rising to 55.4 (from 54.1)on stronger business activity and new orders, though employment contracted for a second month, while prices paid hit a four-year high of 72.6. Firms across both sectors continued to flag tariffs and Middle East related disruption as key pressures on costs and supply chains.As flagged in our G3 update last week, one of the key developments in financial markets was the broad-based sell-off in government debt globally, pushing yields to multi-year highs. This reflected investor concerns over widening fiscal deficits, surging AI-related borrowing, andthe ongoing conflict in Iran, the latter also driving oil prices higher. The dollar has found some support from the rise in US yields coinciding with hawkish commentary from Fed Chair Warsh, with rate differentials doing the work even as broader volatility stays subdued. With bond market pressures showing few signs of abating, the coming month looks set tobe a critical test for policymakers, with the ECB, BoJ, and the Fed all facing decisions on whether to hike into a backdrop of surging yields.The key swing factor for the US dollar will be whether this hawkish repricing proves durable, or fades if upcoming jobs and inflation print sunder shoot expectations.Tensions in the Middle East escalated further this week, with the US carrying out a second wave of strikes on Iranian targets within three days, following Sunday's strikes on Iranian rocket launchers at LarakIs land in the Strait of Hormuz. Iran responded with further drone and missile strikes on US bases in the region, while shipping risk through the Strait remains elevated after tankers exiting the Strait were hit by projectiles earlier in the week. Over the weekend, the US military struck three Iran-linked oil tankers in retaliation for Tehran targeting two American warships, permanently disabling two vessels and destroying a third in the Gulf of Oman. Iran's state media confirmed the strikes, adding that Tehran had responded by hitting three US-affiliated vessels and three oil tankers travelling an unauthorised route through the Strait.Despite the disruption, US officials say flows have held up, with crude exports averaging around 8mb/d, though pressure is building in refined fuel markets, with US gasoline inventories at a decade low and East Coast distillate supplies at a record low. Brent crude has continued to climb on the escalation, ending the week above $96/bbl.
