New Zealand’s labor market continued to weaken in the second quarter, which supports expectations for a 25 basis point rate cut by the Reserve Bank of New Zealand (RBNZ) in August. The unemployment rate rose slightly to 5.2% from 5.1% in the first quarter, and overall employment dropped by 0.1%. The labor force participation rate decreased to 70.5%, the lowest since early 2021. These unemployment figures aligned with the RBNZ’s forecasts and were just below the 5.3% consensus prediction. Private sector wages went up 0.6% from the previous quarter, but the general trend indicates a cooling labor market, potentially leading to more monetary easing.

Probability Of Rate Cut In August

Market indicators show an 88% chance of a rate cut in August, with the RBNZ meeting set for the 20th. Since inflation is within the bank’s target range of 1–3%, there are calls for additional easing to help both the labor market and the economy. Concerns about excess capacity in the economy may prompt the RBNZ to focus more on inflation risks. After the data release, the NZD/USD experienced a slight uptick. With New Zealand’s labor market clearly slowing down, it looks like the RBNZ is on track for a rate cut on August 20th. The unemployment increase to 5.2% and the drop in participation clearly indicate that the economy is losing steam. The market has already factored in an 88% probability of a rate cut, shifting attention to subsequent developments. For traders interested in interest rate derivatives, the message is clear. It may be beneficial to take positions that profit from falling rates, such as receiving fixed payments on interest rate swaps. This strategy leverages the expectation that the RBNZ will lower the Official Cash Rate to bolster the economy.

Currency Market Dynamics

In the currency market, the New Zealand dollar’s slight rise after the data seems to be a short-term reaction, likely because the unemployment figure was not as high as expected. This presents a potential opportunity to take bearish positions on the NZD/USD through put options or shorting futures. A rate cut is typically negative for a currency, and this brief strength may not hold. This perspective is supported by recent July 2025 data showing headline inflation at a manageable 2.1%, well within the RBNZ’s 1-3% target. This gives the central bank the go-ahead to prioritize growth over combating inflation. Additionally, recent business sentiment surveys indicate a significant drop in future hiring plans, highlighting the weak labor outlook. As for options, implied volatility for the NZD is likely to be higher as the August 20th meeting approaches. If the RBNZ follows through with the expected 25 basis point cut without surprises, we could see a drop in volatility right after the announcement. This could be a chance for traders to sell volatility, but it requires careful risk management in case the RBNZ’s message differs from expectations. Historically, we’ve seen a similar trend during past easing cycles, where weak economic data preceded prolonged periods of NZD weakness. The RBNZ’s aggressive rate hikes in 2022-2023 demonstrated its commitment to controlling inflation. This current shift shows its dual focus, now increasingly on supporting employment and economic activity. Create your live VT Markets account and start trading now.

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