Week Ahead: RBNZ, BoC and NFP report
US stocks fell last week, and the USD staged a modest recovery following stickier-than-expected US inflation data for July and a hawkish stance from Federal Reserve Chair Kevin Warsh at the Jackson Hole Symposium.
Looking ahead, the markets are entering September closely monitoring whether central banks will push forward with monetary tightening as persistent inflation pressures combine with signs of slowing in the labour markets.
RBNZ rate decision
The Reserve Bank of New Zealand is expected to hike rates by 25 basis points on September 2, taking the OCR to 2.75%. The hike is fully priced in, so the decision itself is unlikely to be the main driver for the New Zealand dollar.
The focus will instead be on how far the RBNZ thinks rates need to go.
At its July meeting, policymakers said some further tightening could be required, while the May projections pointed to rates reaching 3% by year-end. Markets are now pricing in another hike by year-end and around 50 basis points of additional tightening by mid-2027, taking the OCR towards 3.5%.
That leaves the risk skewed towards a dovish surprise.
Q2 inflation rose to 4.1%, only slightly below the RBNZ's 4.2% forecast, supporting another hike. However, unemployment also increased unexpectedly from 5.4% to 5.6%, while quarterly growth in employment was stronger than expected.
The inflation projections will therefore be important. If the RBNZ signals that 3% is likely to be the peak of the cycle, rather than opening the door to the 3.5% currently priced by markets, the New Zealand dollar could come under pressure.
That risk is even greater following Fed Chair Kevin Warsh's more hawkish tone at Jackson Hole, which could support the USD against the NZD at least in the near term.
Bank of Canada rate decision
The Bank of Canada will announce its September rate decision on September 2, after leaving rates unchanged in July.
The BoC is facing a difficult combination of elevated inflation and relatively weak growth. However, the data since the last meeting has been firmer than expected.
Q2 GDP was stronger than forecast, July CPI remained towards the top of the BoC's 1%-3% target range, while Canada added 75,000 jobs in July. The unemployment rate also fell to its lowest level since July 2024.
The market isn't pricing a rate hike this year, although around 75 basis points of tightening is priced for 2027.
That leaves the currency particularly sensitive to the BoC's communication. The Canadian dollar is already under pressure following the collapse of U.S.-Canada trade talks and the recent decline in oil prices.
The BoC would need to make it clear that higher rates remain a realistic possibility to give the loonie a meaningful reason to recover. If policymakers sound comfortable leaving rates where they are, USD/CAD could extend higher, breaking out of a the descending channel.
U.S. Non-Farm Payrolls
The August Non-Farm Payroll report on Friday could be the most important event of the week for the Federal Reserve and the dollar.
The Fed still has a problem with inflation. PCE remains at 3.7%, well above the 2% target, while the labour market has not weakened enough to make easing an obvious choice.
That means the jobs data could determine whether the Fed needs to keep rates higher for longer or consider another hike.
Markets are currently close to a 50/50 split on a September hike. Given that July payrolls fell by 23,000, the bar for a rebound in August is relatively low. Payrolls don't necessarily need to be particularly strong to shift expectations towards a September hike.
A meaningful upside surprise would likely push 2-year and 10-year Treasury yields higher, tightening financial conditions and potentially putting pressure on equities, particularly long-duration technology stocks.
However, Friday's number won't be viewed in isolation. The market will also have JOLTS, ISM manufacturing and services data and ADP payrolls to digest before NFP.
The key issue is therefore whether the incoming data points to a labor market that is still resilient enough to keep inflation elevated, which could pull the S&P 500 further from its record high— or whether the weakness is finally becoming broad enough to make another Fed hike unnecessary.
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