Above: NZD is falling against all its major peers.
It's a soft start to the new week for the Kiwi Dollar.
The Pound to New Zealand Dollar exchange rate (GBP/NZD) gained on broader NZD weakness owing to a below-consensus New Zealand inflation print.
The Kiwi was down against nearly all its G10 peers after Statistics New Zealand said annual inflation fell to 2.7% year-on-year in the second quarter, which was lower than the 2.8% figure the market expected.
"NZD underperformed most major currencies while New Zealand bonds outperformed. New Zealand Q2 CPI reinforces the case for another RBNZ rate cut," says Elias Haddad, Senior Markets Strategist at Brown Brothers Harriman.
Weakness was driven by a quarterly 0.5% rise, which was softer than 0.6% expected, and well down on the previous quarter's 0.9%.
In short, New Zealand inflation is losing momentum and this could open the door to further Reserve Bank of New Zealand interest rate cuts. This development is etched into currency markets via a weaker exchange rate.
"Today’s data were closer to the RBNZ’s May forecast than we anticipated, suggesting that while today’s data cannot be characterised as 'comfortable', it doesn’t present a roadblock to further OCR cuts," says Miles Workman, an economist at ANZ.
The general rule is that a currency tends to weaken when bets for interest rate cuts start to rise again. However, this NZ inflation data is hardly going to leave lasting marks on the GBP/NZD charts, with the exchange rate showing a clear tendency towards consolidation:
Above: GBP/NZD at daily intervals.
Given the consolidative tone to markets, we see the upper end of a really tight range located at approximately 2.2670 and the lower bound at approximately 2.2403.
We're 50/50 on which gets tested first this week, with such an outcome neatly codified by the Relative Strength Index (RSI) - in the lower panel of the chart - flatlining near 50. This simply says momentum in either direction has stalled.
With few calendar events to look forward to in the coming week, tariff headlines will capture attention, with the EU and Japan needing to strike deals ahead of Trump's August 01 deadline.
Even if tariff tensions flare again, we note that markets have taken a far more sanguine approach to the matter relative to April. It was back in April that NZD tanked as the details of Trump's 'Liberation Day' tariffs became known; a repeat of this weakness is unlikely.
With markets tuning out of tariffs, the continued melt-up in global equities looks set to continue, implying the kind of supportive mood music that the NZD so enjoys will persist.
The NZD has a high correlation with U.S. markets, as they offer a flavour of broader sentiment. Here, corporate earnings will be in focus.
Above: The S&P 500 index is rising, which tends to support NZD (lower panel).
"A whirlwind of corporate earnings is set to captivate U.S. markets this week, with tech giants like Alphabet, Tesla, and Intel, joined by defence and telecom heavyweights, ready to unveil their financial prowess," says Matt Britzman, senior equity analyst at Hargreaves Lansdown.
He points out that earnings season has gotten off to a strong start, with over 80% of early reports surpassing profit expectations.
"Investors are banking on this robust trend to fuel the next leg of this market rally. The current momentum train has largely been backed by expanding multiples, which tend to be hard to sustain. A strong earnings season would offer a welcome backbone for this unloved bull run," he adds.
"The S&P 500 continued to rise this week amid a solid start to the 2Q earnings season. With 59 companies having reported 2Q results, 61% of firms have beaten consensus earnings by more than a standard deviation of estimates, above the historical average of 48%. We forecast the S&P 500 will rise by 10% to 6900 during the next 12 months," says David J. Kostin, an analyst at Goldman Sachs.
Should the equity market momentum stay positive, the odds of more persistent GBP/NZD weakness will grow.