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The Reserve Bank of New Zealand delivered its second consecutive 0.25% rate hike, taking the OCR from 2.50% to 2.75%. The decision was unanimous and was driven by concern that inflation reached 4.1% in the second quarter, pushed higher by Middle East-related fuel costs.
The Kiwi Dollar fell despite the hike. The rate increase was fully priced in, and the RBNZ’s emphasis on a gradual path of tightening appears to have moved the New Zealand Dollar market. The NZD/USD currency pair fell to below 0.5830 after the decision, illustrating again that what matters most is not the hike itself but expectations for future policy. In the Forex market, since today's Tokyo open, the strongest major currency has been the Aussie Dollar, while the weakest has been the New Zealand Dollar.
The Bank of Canada is expected to hold rates today at its scheduled policy meeting. The BoC is widely expected to leave its policy rate unchanged at 2.25%, which would be its seventh consecutive hold. The accompanying statement will be important for USD/CAD, especially as policymakers must balance rising energy-driven inflation risks against the economic impact of the escalating trade/tariff conflict with the US. A more dovish-than-expected message could weaken the Canadian Dollar, while a clear concern about inflation could provide the currency with support.
Crude oil has made a much stronger bullish breakout. Yesterday’s tentative move turned into a sharp surge. Brent Crude closed above $95 and traded close to $97 today, while WTI has moved above $91 and is trading at its highest level since late July. This is no longer a weak technical breakout, but one that decisively invalidates the former wide bearish price channel, which had contained the price action since the end of the Iran-Israel-USA war.
Strait of Hormuz concerns are driving this crude oil rally. Escalating US-Iran hostilities and reports of attacks on shipping have intensified fears that disruption to energy flows through the Strait of Hormuz could become prolonged. Brent settled up 4.6% yesterday at $94.65, while WTI gained 5.2% to settle at $90.22. It had seemed as if the USA had managed to open the Strait enough to remove this leverage from the Iranian regime, so it remains to be seen just how much higher Iran can drive the price.
The US Dollar remains firm near its recent high. The Dollar Index is trading near 99.7, supported by rising US yields and growing concern that the oil-price shock could force the Federal Reserve to maintain a tighter monetary policy stance. The US 10-year Treasury yield has climbed above 4.80%, which is a 2.5 year high. Trend traders will be long of the 10Y Yield futures if they can size appropriately - note that micro-futures are available at the CME.
Yesterday’s US manufacturing data were softer, but still expansionary. The ISM Manufacturing PMI declined from 55.6 to 54.6, below the expected 55.2. However, the sector remains in expansion, while elevated oil prices and rising yields are likely to remain the more influential themes in markets.
Gold remains under pressure. Gold has fallen to below $4,300 per ounce after losing almost 6% over the previous three trading sessions. Although the geopolitical backdrop is dangerous, rising yields and the firm US Dollar are currently outweighing safe-haven demand.