Kiwi dollar dips, oil prices rise amid escalating conflict
Geopolitical tensions surged over the weekend as the US launched strikes on Iranian nuclear sites, sparking fears of wider regional conflict and economic disruption.
Investors flocked to safe haven assets, with the US dollar regaining strength and the New Zealand dollar falling below 60c.
“Reclaiming its tested safe-haven status, the USD has regained strength,” said Jarrod Kerr (pictured left), Kiwibank chief economist. “The risk remains tilted toward further downside for the Kiwi as the risk-off sentiment continues.”
Inflation risks rise, growth outlook under pressure
Kerr warned that continued disruption in the Middle East would likely “exacerbate energy supply concerns, causing a bout of global inflationary pressures.”
“In today’s already fragile environment, facing tariff trade disruption and an economy only just emerging from recession, a near-term rise in fuel costs would likely place additional pressure on Kiwi households and businesses,” he said. “We must flag the downside risks to the global and domestic outlook.”
Meanwhile, the Fed and Bank of England held rates steady last week, adopting a cautious stance amid global uncertainty.
GDP growth rebounds but fragility remains
On the home front, New Zealand’s economy grew 0.8% in the March quarter, ahead of both Kiwibank’s forecast (0.7%) and the Reserve Bank’s (0.4%).
“It’s nice to have some good news. But we’re holding our horses,” Kerr said. “The economy remains 0.7% below pre-recession levels… we’re still crawling out of the deep hole we fell into last year.”
He cautioned the summer momentum won’t last, with tariff volatility and weakening domestic demand expected to drag Q2 GDP lower.
Slowing indicators point to weaker Q2 data
Recent data shows softening activity, including declining electronic card spending and contracting PMI and PSI indices.
“Weak confidence amid economic fragility and tariff uncertainty is resulting in softening demand,” Kerr said. “It’s under these conditions that we’re expecting a weaker Q2 GDP outturn.”
Interest rate cuts off the table – for now
Kiwibank’s Ross Weston said strong current data has anchored Kiwi interest rates, with “just -5bp of cuts priced for July.”
“Expectations for a -25bp rate cut in July have been effectively ruled out,” Weston said. “For now, it’s a case of watch, worry, and wait.”
US dollar rally likely to continue
Geopolitical tensions are also driving currency trends, according to Kiwibank’s Mieneke Perniskie.
“While the US dollar has been beleaguered for months, it has returned as a safe haven currency,” she said, with the Kiwi closing last week at 0.5964. “Further Kiwi upside will be off the cards.”
ASB’s Tuffley: Fuel price spike may rattle RBNZ
ASB chief economist Nick Tuffley (pictured right) said the US strikes on Iran’s deeply buried nuclear facilities risk regional escalation.
“Looking very narrowly at NZ, a sustained lift in fuel prices would make the RBNZ more nervous about inflation expectations creating unhelpful behavioural shifts,” Tuffley said.
He noted Q1 GDP was encouraging but flagged that momentum may not last.
“From here we expect GDP to slow a bit… domestic demand still looks like it isn’t firing on all cylinders yet,” Tuffley said.
Upcoming data to steer policy outlook
Markets will watch closely for trade, employment, and confidence data, alongside inflation gauges in Australia and the US.
“The price gauges are very topical at the moment, including the inflation expectations result,” Tuffley said. “Global developments could temper investment intentions, but the recent budget’s Investment Boost policy could get some fence-sitters moving.”
