Inflation data for New Zealand in Q2 2025 came in a bit lower than expected. The quarter-on-quarter increase is 0.5%, while analysts had predicted 0.6%, following a previous rate of 0.9%. On a year-over-year basis, inflation hit 2.7%, slightly below the forecasted 2.8%, but up from the previous 2.5%. For tradeable Consumer Price Index (CPI) items, the rise was 0.3% quarter-on-quarter, short of the expected 0.5% and down from 0.8%.

CPI Non-Tradeables Overview

CPI non-tradeables saw a 0.7% increase quarter-on-quarter, aligning with predictions, though it was previously at 1.1%. This data has led to a decline in both the kiwi dollar and New Zealand yields. A lower CPI could negatively impact the NZD but may benefit New Zealand stocks. We think this weaker inflation number could challenge the Reserve Bank of New Zealand’s tough stance. The central bank has kept its Official Cash Rate at a high 5.5% since May 2023 due to inflation fears. This new data weakens their argument and may lead to a shift in policy sooner than expected.

Interest Rate Influence On Market

Traders in derivatives should prepare for a weaker New Zealand dollar, as interest rate differences are likely to lessen compared to other currencies. The market is already adjusting, with overnight index swaps indicating a higher chance of a rate cut by early 2025, ahead of the central bank’s own timeline. This supports shorting the kiwi, especially against the Australian dollar, which is seeing a higher inflation rate of 3.6% in the first quarter of 2024. This situation is favorable for New Zealand shares and interest rate-sensitive assets. Historically, the expectation of lower rates has boosted the NZX 50 index, similar to the 2019 easing cycle that led to a major market upturn. We recommend considering purchases of NZX 50 futures or call options to take advantage of this potential growth. For those focused on rates, the drop in government bond yields can be traded directly. Traders might explore receiving fixed payments in interest rate swap agreements, betting that benchmark rates will fall further in the next few months. This strategy can yield profits as the market adjusts to a more lenient central bank policy outlook. Create your live VT Markets account and start trading now.

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