NZD Jobs Data and RBNZ Messaging: Assessing Inflation Risks and Currency Outlook

NZD: Jobs data allows RBNZ to stay put

New Zealand released 2Q jobs data overnight, and while the labour market clearly remained quite tight, the Reserve Bank will likely welcome tentative signs of loosening conditions. The unemployment rate rose a tad more than expected, from 3.4% to 3.6%, and while hiring was strong, wage growth eased off a bit from 4.5.% to 4.3%.

The RBNZ is facing a situation where the latest CPI numbers came in below their forecasts, but showed signs of stickiness in the core measures, putting a greater focus on labour dynamics. The quite outdated labour statistics released overnight moved in the right direction and allow the RBNZ to keep its messaging unchanged at the August meeting. However, we continue to see risks the Bank is underestimating the domestic inflation risks and markets are underestimating the risks of another hike before year-end.

NZD is dropping in line with other pro-cyclical currencies this morning after the US credit downgrade, but we think the Kiwi dollar has now priced in much of the negative news (China growth repricing, RBNZ pause) and is emerging as an attractive option in August should a stable risk environment and subdued FX volatility favour carry trades and recovery in undervalued currencies. We still expect a recovery to 0.63 in NZD/USD by the autumn.