RBNZ rate hike expectations lift New Zealand Dollar

The New Zealand Dollar strengthens on expectations that high inflation will prompt a 25 bps RBNZ rate hike to 3%.
A firm US Dollar limits gains in NZD/USD as the Fed’s next policy meeting approaches.
Markets assign an 89.5% probability to an October Fed rate pause, with hikes expected to wait until December.

Buying interest returns to NZD/USD during Tuesday’s European session, lifting the pair to around 0.5690 after modest losses the day before. Support for the New Zealand Dollar (NZD) comes from traders’ expectations that the Reserve Bank of New Zealand (RBNZ) will raise interest rates by 25 basis points to 3% on Wednesday. That would follow increases in July and September, against a backdrop of high inflation fuelled by rising oil prices.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Further gains in NZD/USD could face resistance from a stronger US Dollar (USD). Caution ahead of Wednesday’s interest rate decision by the US Federal Reserve (Fed) is supporting the US currency.

An October hold followed by a possible December rate increase remains the expectation in financial markets for the Federal Reserve. The CME FedWatch Tool currently puts the market-implied probability of unchanged rates at the October policy meeting at 89.5%, while the likelihood of a December increase stands at 82.3%.

Highlighting persistent price pressures, Navy Federal Credit Union chief economist Heather Long said, “Inflation is still the No. 1 problem in the US economy, and there are a lot of signs it is getting more broad-based.” She also said, “For consumers, it means really high borrowing costs for the foreseeable future.” On the timing of a hike, however, Heather added, “given that it’s right before an election,” followed by, “they won’t hike in October.”

Can Pre-FOMC Positioning Sustain Support for the Dollar?

According to ING strategists, “pre-FOMC positioning may also be kicking in,” as the forward-looking FX market views Chair Kevin Warsh’s renewed inflation commitments as “reinforcing the structural floor for the Dollar.” Their assessment is that “as discussed in our preview, we sympathise with this view and expect a broadly supported Dollar this week,” indicating that support for the currency is likely to persist heading into the FOMC decision.

New Zealand Dollar: Key Questions Answered

Which factors shape movements in the New Zealand Dollar?

Investors widely trade the New Zealand Dollar (NZD), commonly called the Kiwi. While New Zealand’s economic health and central bank policy largely determine its value, several distinctive influences also affect the currency. China’s economic performance is one such driver, given its position as New Zealand’s largest trading partner. Weak developments in China are likely to reduce demand for New Zealand’s exports, weighing on its economy and, in turn, its currency. Dairy prices are another important influence, as dairy is New Zealand’s leading export. Higher prices increase export earnings, supporting both the economy and the NZD.

Why do RBNZ policy decisions matter for the New Zealand Dollar?

Keeping inflation within a 1% to 3% range over the medium term, and close to the 2% midpoint, is the Reserve Bank of New Zealand’s (RBNZ) objective. The bank calibrates interest rates to achieve this goal. If inflation runs too high, it raises rates to slow the economy. Higher rates also lift bond yields, making investment in New Zealand more attractive and supporting the NZD. Rate cuts, by contrast, generally weaken the currency. NZD/USD can also be strongly influenced by the interest rate differential: the gap between actual or expected New Zealand rates and those set by the US Federal Reserve.

What can economic releases mean for the New Zealand Dollar?

By offering a measure of New Zealand’s economic health, macroeconomic releases can affect the valuation of the New Zealand Dollar (NZD). Robust growth, low unemployment and strong confidence indicate an economy that is supportive of the currency. Rapid economic expansion draws foreign investment and, when accompanied by elevated inflation, may prompt the Reserve Bank of New Zealand to raise interest rates. Weak economic readings, on the other hand, are likely to weigh on the NZD.

Why does the New Zealand Dollar respond to wider risk appetite?

Risk-on conditions generally favour the New Zealand Dollar (NZD). When investors see limited risks across markets and feel positive about growth, the outlook for commodities and so-called ‘commodity currencies’, including the Kiwi, tends to improve. During market turmoil or economic uncertainty, the reverse usually applies: investors sell higher-risk assets in favour of more stable safe havens, and the NZD tends to lose ground.