US tech sell-off weighs on G10 commodity FX alongside dovish RBNZ update

NZD: Dovish RBNZ policy update hits kiwi hard

The biggest mover overnight has been the New Zealand dollar which has weakened sharply by over 1% against the US dollar. It has resulted in the NZD/USD rate falling back towards 0.5800 while AUD/NZD has risen above 1.1050. The sharp sell-off for the kiwi was triggered by the RBNZ’s dovish policy update overnight. The RBNZ resumed their rate cut cycle by lowering their policy rate by a further 25bps to 3.00% after leave the policy rate hold for the first time at the previous meeting in July. While the decision to resume rate cuts today was widely expected, the vote was more divided with 2 out of 6 members even voting for a larger 50bps rate cut today revealing a dovish shift in thinking. At the same time, the updated policy communication was more dovish than expected as well signalling clearly that the RBNZ is planning on delivering two further 25bps cuts by the end of this year. It would lower the policy rate towards the bottom of the estimated range for the neutral policy rate between 2.5% and 3.5%. RBNZ Governor Hawkesby stated that the RBNZ’s updated forecast for the policy rate “troughs at around 2.5% by the end of this year…Whether we end up going faster or slower than that will be determined by developments”.

The dovish policy communication reflects more concern over the recent loss of growth momentum. The RBNZ stated that “New Zealand’s economic recovery stalled in the second quarter of this year” with spending by households and businesses constrained by global economic policy uncertainty, falling employment, higher prices for some essentials, and declining house prices. The unemployment rate had risen to a new cyclical high of 5.2% in Q2. The RBNZ’s updated forecasts for economic growth were revised down to show growth of just 1.1% for the 12 months through to March 2026 compared to the previous forecast of 1.5%. The RBNZ’s more aggressive easing cycle continues to remain a headwind for kiwi performance. The kiwi and other commodity currencies have also been undermined by the deterioration in investor risk sentiment in recent days. A sell-off in US tech stocks (Nasdaq down -1.5% yesterday) has contributed to the NZD, AUD and NOK underperforming this week while the safe haven currencies of the JPY and CHF have outperformed.

AGGRESSIVE RBNZ EASING WEIGHING ON NZD

Source: Bloomberg, Macrobond & MUFG GMR

GBP: Another UK upside inflation surprise lifts pound

The pound has strengthened following another upside inflation surprise in the UK this morning. It has resulted in EUR/GBP falling back towards support at the 0.8600-level while cable has risen back up towards resistance at the 1.3500-level. The release of the latest UK CPI report for July revealed that headline inflation surprised to the upside for the fourth consecutive month rising to 3.8%. However, it was in line with the BoE’s latest forecasts. BoE policymakers have become concerned recently over the risk of higher inflation proving more persistent which has dampened expectations for further rate cuts this year. Governor Bailey signalled that they were less confident over the need to continue delivering quarterly rate cuts. Another upside inflation surprise today follows on from stronger growth in Q2 putting a further dampener on market expectations for a November rate cut. The UK rate market is now pricing in only around 7bps of cuts by the November MPC meeting and around 2bps by the February MPC meeting to better reflect a slower pace of easing going forward.     

The details of the CPI report continued to reveal that core and services inflation remain uncomfortably elevated arguing against cutting rates further in the near-term. Core inflation rose by 0.1ppts to 3.8% compared to an average rate of the last year of 3.5% showing a clear lack of progress towards converging to the BoE’s inflation target. Similarly, services inflation picked up even more strongly by 0.3ppts to 5.0% in July. Our European economist did highlight though that the BoE’s trimmed services inflation measure (excluding indexed/volatile components, rents and travel) eased by 0.1ppts to 4.2% indicating that underlying momentum is not as bad as first feared. Nevertheless, the BoE will be concerned higher inflation including the recent pick-up in food inflation will feed through to inflation expectations adding to persistence risks. Over the long-run more persistent inflation is a negative development for the pound.   

KEY RELEASES AND EVENTS

Source: Bloomberg & Investing.com