New Zealand Dollar Stems Bleeding

 | Aug 03, 2022 05:49AM ET

The New Zealand dollar has edged higher today. In the European session, NZD/USD is trading at 0.6261, up 0.11% on the day.

NZD/USD took a tumble on Tuesday, as nervous investors waited to see if Nancy Pelosi would indeed visit Taiwan, despite furious threats from China. The New Zealand dollar slipped 1.24%, its worst daily performance since mid-June. A defiant Pelosi did indeed land in Taiwan on Tuesday night. China announced it will conduct live-fire drills in areas encircling Taiwan this week, but the currency markets are calm. China/Taiwan remains a hotspot and any incident between Taiwanese and Chinese forces could trigger a geopolitical crisis and volatility in the markets.

h2 New Zealand wage inflation jumps/h2

New Zealand employment in Q2 came in at a flat 0.0%, unchanged from the first quarter. This was shy of the 0.4% estimate and points to a stagnant labour market. What was of particular interest was that annual wage inflation jumped 3.4% in Q2, nudging up from 3.2% and above the forecast of 3.1%. This was the highest level since 2006 and will likely put pressure on the Reserve Bank of New Zealand to remain aggressive in its efforts to curb inflation.

The RBNZ has raised rates to 2.50%, but there is no sign of inflation easing, as it climbed to 7.3% in Q2, up from 6.9% in the first quarter. The central bank’s aggressive rate cycle has cooled the housing market and dampened business and consumer confidence, raising fears that the economy could tip into a recession. The good news is that the labour market remains tight, in part because the country’s borders have been closed and the lack of migrant workers has resulted in an acute shortage of labour. The markets have priced in another 0.50% at the August 17th meeting.

The RBNZ is also concerned about inflation expectations, which if left unchecked will strengthen inflation and exacerbate the Bank’s efforts to curb inflation. Inflation Expectations accelerated for eight straight quarters and hit 3.29% in Q1, up from 3.27% and a 31-year high. We’ll get a look at Inflation Expectations for Q2 next week, and if the current upward trend continues, it will make a 0.50% hike more likely.