NZD/USD recovers but faces policy headwinds – BBH

NZD/USD recovered above 0.5900 but faces some near-term headwinds. New Zealand’s Q2 labor market data bolsters the case for additional RBNZ policy rate cuts, BBH FX analysts report.

Soft labour data strengthens RBNZ rate cut case

"New Zealand employment matched consensus and fell -0.1% q/q vs. 0.1% in Q1, whereas the RBNZ had penciled in a 0.2% increase. The unemployment rate rose 0.1pts to a five-year high at 5.2% and the participation rate dipped -0.2pts to a four-year low at 70.5%, suggesting the labor market is losing both breath (fewer people engaged) and strength (more people unemployed)."

"Private wages increased 0.6% q/q vs. 0.4% in Q1, in line with RBNZ projection and marginally higher than the 0.5% consensus. On an annual basis, private wages growth slowed to a four-year low at 2.2% vs. 2.5% in Q1 and is broadly consistent with the RBNZ 2% target given trend labor productivity growth of 0.2%."

"Over the next 12 months, the swaps market price-in nearly 50bps of easing and the policy rate to bottom at 2.75%. The US’s plan to impose a 15% tariff (up from an initial 10% proposal) on New Zealand goods from Friday sharpens the case for looser monetary policy. The next RBNZ policy rate decision is August 20, and a 25bps cut to 3.00% is virtually fully priced-in."