The kiwi has traded in a tight range this week, as markets sit on their hands ahead of today’s RBNZ meeting, with the currency little changed so far this week.
Locally, data has been limited, with markets holding out for today’s RBNZ meeting. As flagged in our preview last week, we expect a 25bp hike to2.75%. With the move nearly fully priced (96%), the key focus for marketsand the kiwi will be on the updated OCR track in the MPS. We expect theOCR track to look broadly similar to May, with a peak of ~3.3% (in 2029)still reasonable, though any upward revision in this path could see thekiwi rally.
We also expect a modest upward revision to the Q3 inflation forecast,which was revised modestly lower to 3.3% in July just ahead of thestronger Q2 CPI print. We also anticipate the the labour market outlookshould be little changed, with softer unemployment offset by stronger employment growth. On growth, resilient higher-frequency data raise the risk of a modest upward revision to the bank's flat Q2 forecast.
Turning to the Middle East, US and Iran traded strikes for the first time in about a month. The US hit Iranian rocket launchers on Larak Island in the Strait of Hormuz, alleging IRGC forces were preparing sea mines. Iran retaliated with missile and drone strikes on US bases in Jordan and a drone toward the UAE which were all intercepted. The attacks followed US Treasury Secretary Bessent's "economic onslaught" pledge against Iran and its trading partners, though China, Russia and others have largely shrugged this off so far. Given the flare-up in tensions, Brent crude rose sharply above $90/bbl.
Looking ahead, the key focus this week will be US non farm payrolls data for August. Markets expect payrolls to rise 58k following July's -23k fall,with the unemployment rate holding at 4.1%. While a stronger print could see the US dollar rally and build the case for the Fed to hike, we don't share this view. We see the US labour market as still showing signs of softness, which has been a key reason behind the lack of broader price pressures across the economy. Against this backdrop, our view is that the Fed may should look through any upside surprise, given pockets of underlying economic weakness elsewhere. Indeed, we continue to hold the view that the Fed doesn’t move rates this year.
