New Zealand Dollar gives away gains as Iran’s war offsets RBNZ’s hawkishness

The New Zealand Dollar (NZD) is trading lower against the US Dollar (USD) for the second consecutive day on Wednesday, as the US-Iran conflict overshadows the Reserve Bank of New Zealand’s (RBNZ) hawkish monetary policy stance. The NZD/USD pair trades at 0.5818 at the time of writing, after pulling back from 0.5874 highs on Tuesday, although it remains about 3.3% above late-June lows.

Traders are cutting back NZD longs amid the sour market sentiment, as the conflict in Iran threatens to escalate out of control. The US pounded targets in Iran for the 11th consecutive day, and US President Donald Trump flagged attacks on Pickaxe Mountain, an area believed to be connected with Iran’s nuclear facilities. 

Meanwhile, Reuters reported that three Saudi Arabian vessels turned around in the Red Sea after the “maritime embargo” announced by the Iran-backed Houthis on Tuesday. This has boosted concerns about disruptions in Crude supply, pushing Oil prices higher and increasing risk-aversion.

RBNZ tightening bias underpins Kiwi

Kiwi's downside attempts, however, have been limited so far, as hopes of further RBNZ monetary tightening are underpinning the pair. Strategists at Brown Brothers Harriman note that NZD/USD has “rallied to near a seven-week high” despite a “mixed” New Zealand Q2 CPI print, with headline inflation rising more than expected in Q2 but "marginally lower than the RBNZ projected in May.”

BBH analysts are convinced that “above target inflation and a more favorable domestic growth outlook argue for additional RBNZ rate hikes, which is NZD supportive.” At its last July 8 meeting, the RBNZ “raised the Official Cash Rate (OCR) 25bps to 2.50% and indicated that ‘further OCR increases appear likely at upcoming meetings,’” reinforcing the constructive backdrop for the Kiwi.