NZ Labor Report Set to Fuel RBNZ Tightening Bets, Slamming AUD/NZD

The Reserve Bank of New Zealand (RBNZ) is expected to continue tightening monetary policy, putting pressure on the AUD/NZD exchange rate. While markets have already priced in a pause from the Reserve Bank of Australia's (RBA) rate hikes, the RBNZ still has work to do to contain domestic inflation.

New Zealand's second-quarter CPI rose 4.1% y/y, exceeding the RBNZ's forecast and indicating that price pressures remain more persistent than expected. The RBNZ's own projections suggest a labor market consistent with an in-line employment report tomorrow would reinforce the view that policy needs to move further into restrictive territory.

A stronger-than-expected employment report could raise September hike odds and support an Official Cash Rate move toward the top of the 2.75%-3.00% range, which is currently expected by many economists. The RBNZ's ability to narrow the policy differential with the RBA would provide fundamental support for the New Zealand Dollar against its Australian counterpart.