New Zealand Dollar trades steadily amid oil-driven inflation pressures and RBNZ rate hike bets

• Q3 CPI is expected to ease, yet surging energy prices underpin an 80% probability of an RBNZ rate rise.
• Higher oil prices and geopolitical uncertainty in the Middle East lend support to the US Dollar.
• A pause next week is priced in by markets, but Chair Warsh leaves forthcoming rate decisions open.

With New Zealand’s Q3 Consumer Price Index (CPI) inflation figures due later on Thursday, caution ahead of the release is supporting the New Zealand Dollar (NZD). Following volatile trading, NZD/USD is holding in positive territory at around 0.5690 during Wednesday’s European session.

Annual inflation is forecast by economists to slow from 4.1% to 3.8% in Q3, while the quarterly rate is expected to fall from 1.5% in Q2 to 0.8%. Any relief could prove brief, however. Higher oil prices are expected to push inflation up again in the final three months of the year, reinforcing the argument for additional monetary tightening.

Against that backdrop, swap markets now imply a probability of nearly 80% that the Reserve Bank of New Zealand (RBNZ) will raise its official interest rate to 3.00% at next week’s policy meeting. RBNZ Chief Economist Paul Conway pointed to upside risks to the Q4 outlook from elevated oil prices and currency movements. Although he said the direction of interest rates "is most likely up," Conway stressed that October’s decision remains "wide open."

Safe-haven demand is helping the US Dollar (USD) hold firm, leaving NZD/USD little changed as rising oil prices intensify concerns over global inflation. Crude advanced while traders weighed conflicting signals on diplomatic contacts between the United States and Iran. Talks are still under way, but sentiment came under pressure after high-level meetings in Tehran involving Pakistan’s army chief, Field Marshal Asim Munir, and senior Iranian leaders. A diplomat participating in the discussions with Washington said efforts to resolve the conflict were continuing, while making clear that reports of an imminent final agreement were premature.

Attention in financial markets is also focused on the Federal Reserve’s next policy step. The CME FedWatch Tool indicates that traders assign an 85% probability to unchanged interest rates next week and an 88% probability to a December rate rise. Fed Chair Kevin Warsh, however, struck a neutral tone, stressing that he does not "prejudge" interest rate decisions. Markets therefore lack a clear indication of whether the central bank will increase rates or leave them unchanged at its forthcoming October policy meeting.

Long-dated US Treasury yields fall while oil recovery keeps short end steady

The decline in US yields was largely confined to longer maturities, according to Deutsche Bank analysts, who noted that "10yr Treasury yields also declined by -3.0bps to 5.11%, though 2yr yields (+0.4bps) ended the day little changed as oil prices reversed their decline." The divergence suggests that the recent oil recovery has barely altered expectations at the short end of the curve, despite a modest easing in longer-dated yields.