NZD drifts lower as domestic backdrop shows signs of improvement

Since the week's open, the kiwi has drifted modestly lower, extending asoft run as broader risk sentiment stayed cautious amid the ongoingMiddle East tensions.New Zealand's domestic calendar was light this week, with the mainsignals coming from bank data rather than official releases, but togetherthey point to a modest firming in momentum. Westpac card spendingrose 2% (per capita) in July, breaking a sideways pattern that had held formost of the year. The jump in spending was supported by an easing infuel prices through July. Groceries and discretionary spending bothpicked up, led by restaurants and entertainment, with the latter partlytied to the FIFA World Cup, alongside a lift in gambling activity. Havingsaid this, NZ fuel prices remain well above pre-conflict levels, andWestpac noted that over a third of households have pulled back ondiscretionary spending as a result.The ANZ Truckometer pointed the same way. The Light Traffic Index rose1.3% in July, turning higher after months of softness likely tied to fuelcosts. The Heavy Traffic Index eased slightly in the month but is still up1.6% on the year and continues to trend higher. Overall, this is consistentwith robust economic growth. Globally, attention has stayed fixed on the Middle East, where oil ralliedfurther as hopes of reopening the Strait of Hormuz continue to fade. Iransaid it was nearing a shipping route agreement with Oman but reiteratedthat Washington must lift its blockade on Iranian ports and paycompensation for war damages before the strait reopens. Trump pushedback on those terms, instead demanding Iran pay compensation forcasualties across the region, an escalation that markets read as reducingthe odds of a near-term resolution and pushed oil higher again. Attacks on shipping routes near the strait have continued, adding to analready tight market that Russia's export ban has made worse. Trafficthrough Hormuz remains heavily constrained, and attention isincreasingly turning to other potential flashpoints, including alternativeexport routes through the UAE and the Red Sea, where Houthi activitycontinues to threaten Saudi Arabia's key shipping corridor.Looking ahead, focus turns to US CPI data for July due tonight. Marketsexpect headline inflation to rise 0.1% MoM (from -0.4%), with the annualrate easing to 3.4% (from 3.5%), while core inflation is expected to rise0.2% MoM (from 0%), with the annual rate slipping to 2.5% (from 2.6%).US inflation has so far shown little sign of second round effects, and thisreport is one of two remaining before the September Fed meeting, soanother mild print in line with expectations, or below, could help lock in ahold. We continue to expect the Fed to keep rates unchanged for the restof the year, despite markets still pricing one more hike by year end.