NZ Dollar Slumps on Surprising Inflation Expectations

The New Zealand dollar declined by 0.5% to a two-week low of $0.5829 after the Reserve Bank of New Zealand released its survey of inflation expectations, showing a surprisingly low reading on one-year outlook.

The one-year outlook fell sharply to 2.6%, from 3.4%, taking it back to where it was before the war in Iran drove up fuel prices.

Satish Ranchhod, a senior economist at Westpac, said 'This will be welcome news for the RBNZ' but noted that core inflation was at firm levels even before the Middle East conflict and business surveys point to ongoing pressures on operating costs.

Despite this, investors are still wagering heavily on a September rise in the 2.5% cash rate, with key 2-year swap rates falling 4 basis points after the data to a three-week trough of 3.5857% on bets that rates might not have to rise as much as first thought.

In contrast, the Australian dollar drew comfort from the risk of tightening at home, with Reserve Bank of Australia Assistant Governor Christopher Kent emphasizing that the risks on inflation and rates were very much to the upside.