NZD/USD outperforms as NZ labour market bounces back strongly, shrugging off growth concerns – MUFG

The New Zealand dollar has continued to outperform following the release of the latest employment report from New Zealand. The report has helped lift the NZD/USD rate back above 0.7050. According to economists at MUFG Bank, the labour market report reinforces Reserve Bank of New Zealand (RBNZ) rate hike expectations.

Fully pricing a rate hike from the RBNZ 

“The latest employment report revealed that the unemployment rate fell much more sharply than expected by 0.6 point to 4.0% in Q2. It is now far below the RBNZ’s own unemployment rate forecast of 4.7% and is likely close to levels judged as consistent with full employment. At the same time, there was evidence of a pick-up in wage growth. Headline wages increased by 0.7% QoQ in Q2 compared to 0.4% in Q1.”

“The tightening labour market which is being exacerbated by closed borders, and building wage pressure will trigger greater concern from the RBNZ. We now expect the RBNZ to begin raising rates this month and to follow up with at least one more rate hike later this year.”

“The domestic interest rate market is already pricing in that more hawkish scenario but the New Zealand dollar has failed to fully track the recent move higher in rates as spreads have moved sharply in its favour. Lingering concerns over the outlook for global growth have been weighing on commodity currencies more broadly even as global equity markets and commodity prices remain close to recent highs.”