New Zealand Dollar Leads the Pack

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A combination of geopolitical and domestic headlines underpins the NZD advance.

The New Zealand dollar advances against all G10 rivals in midweek trade as markets welcome headlines that the Iran war is close to ending and news that Kiwi wages rose handsomely in the first quarter.

Global markets are in 'risk on' mood Wednesday after it was reported the U.S. and Iran could sign a memorandum to end the conflict within 48 hours.

Reports suggest the memorandum will allow for the reopening of the Strait of Hormuz and pave the way to a detailed agreement on Iran's nuclear programme. Oil prices and the dollar dropped while stocks rose, presenting the NZ dollar classic conditions to engage a rally.
"NZD/USD surged on broad USD weakness, pushing toward 0.6000, and nearly wiping out its war-driven losses," says Elias Haddad, Global Head of Markets Strategy at Brown Brothers Harriman.

GBP/NZD dropped by nearly a per cent to 2.2796.

While external sentiment is in the driving seat and underpins NZD gains, domestic data can't be ignored as there was an upside surprise in Q1 wage data that boosted RBNZ rate hike pricing.
Private regular wages growth printed a stonking 0.5% q/q, beating expectations and the RBNZ forecast for 0.4%.

"That was enough for the swaps market firmed up odds of a first full 25bps RBNZ rate hike at the July 8 meeting, and a total of 125bps of tightening over the next twelve months to 3.50%," says Haddad.

Strong wage growth can boost demand in the economy to the extent that it increases inflation, which central banks fight by raising interest rates.

Higher interest rates tend to attract foreign capital inflows which in turn boost the currency, underscoring why the NZ dollar is advancing in midweek trade.

However, Haddad cautions that "the risk is the RBNZ delivers less rate increases than is currently priced in which is a headwind for NZD."

To be sure, expectations for 125bp worth of hikes over a 12-month period will surely squeeze the economy: does the RBNZ have the guts to deliver?

There's a risk the market is getting ahead of itself: StatsNZ also reported Wednesday that employment growth undershot expectations at 0.2% q/q, down from 0.5% in the previous quarter, whereas the consensus wanted 0.3% and the RBNZ had forecast a much healthier outcome at 0.4%.

The unemployment rate dipped to 5.3%, meeting RBNZ expectations, although that result is largely because fewer people were looking for work.

If the labour market does weaken we would anticipate wages to quickly retreat, meaning there's ample space for the market to recoup rate hike bets.

If so, NZD would be primed to retreat.

"There’s still substantial slack left in the labour market. The underutilisation rate is still uncomfortably high," says Alexandra Turcu, Economist at Kiwibank. "It would make no sense for the RBNZ to hike to OCR today (or next month or even the month after that)."