New Zealand Dollar holds steady as oil pressures inflation, RBNZ rate hike bets

Easing Q3 CPI expected, but soaring energy costs fuel an 80% chance of an RBNZ rate hike.
US Dollar receives support amid rising oil prices and geopolitical uncertainties in the Middle East.
Markets price in a pause next week, though Chair Warsh keeps upcoming rate decisions open.

NZD/USD remains in positive territory after experiencing volatility, trading around 0.5690 during European hours on Wednesday. The New Zealand Dollar (NZD) receives support from market caution ahead of New Zealand’s Q3 Consumer Price Index (CPI) inflation data, due later on Thursday.

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

Economists expect annual inflation to ease to 3.8% in Q3 from 4.1% previously, with quarterly inflation forecast to drop to 0.8% from 1.5% in Q2. However, any respite may be short-lived, as rising oil prices are expected to drive an acceleration in inflation during the final three months of the year, strengthening the case for further monetary tightening.

In response, swap markets are now pricing in nearly an 80% chance that the Reserve Bank of New Zealand (RBNZ) will hike its official interest rate to 3.00% at its policy meeting next week. Highlighting these pressures, RBNZ Chief Economist Paul Conway noted upside risks to the Q4 outlook due to elevated oil prices and currency movements. While Conway noted that the trajectory for interest rates "is most likely up," he emphasized that the October decision remains "wide open."

The NZD/USD pair moves little as the US Dollar (USD) holds its ground on safe-haven demand, driven by rising oil prices that have heightened global inflation concerns. Crude prices climbed as traders evaluated mixed signals regarding diplomatic engagements between the United States and Iran. Although negotiations remain active, market sentiment faced headwinds following high-level meetings in Tehran between Pakistan’s army chief, Field Marshal Asim Munir, and senior Iranian leaders. Addressing the status of discussions with Washington, a diplomat involved in the talks clarified that while conflict resolution efforts are ongoing, reports of an imminent final agreement are premature.

Meanwhile, financial markets are closely gauging the Federal Reserve's next move. According to the CME FedWatch Tool, traders are currently pricing in an 85% probability that the Fed will keep interest rates on hold next week, alongside an 88% chance of a rate hike in December. However, Fed Chair Kevin Warsh maintained a neutral stance, emphasizing that he does not "prejudge" interest rate decisions. This leaves markets without a definitive signal on whether the central bank will raise or hold rates steady at its upcoming October policy meeting.

US Treasury long end eases as oil rebound leaves front end steady

Analysts at Deutsche Bank highlight that the move in US rates was concentrated at the long end, with "10yr Treasury yields also declined by -3.0bps to 5.11%, though 2yr yields (+0.4bps) ended the day little changed as oil prices reversed their decline." This pattern underscores how the recent rebound in oil has done little to shift expectations at the front end, even as longer maturities saw a modest pullback in yields.

New Zealand Dollar FAQs

What key factors drive the New Zealand Dollar?

The New Zealand Dollar (NZD), also known as the Kiwi, is a well-known traded currency among investors. Its value is broadly determined by the health of the New Zealand economy and the country’s central bank policy. Still, there are some unique particularities that also can make NZD move. The performance of the Chinese economy tends to move the Kiwi because China is New Zealand’s biggest trading partner. Bad news for the Chinese economy likely means less New Zealand exports to the country, hitting the economy and thus its currency. Another factor moving NZD is dairy prices as the dairy industry is New Zealand’s main export. High dairy prices boost export income, contributing positively to the economy and thus to the NZD.

How do decisions of the RBNZ impact the New Zealand Dollar?

The Reserve Bank of New Zealand (RBNZ) aims to achieve and maintain an inflation rate between 1% and 3% over the medium term, with a focus to keep it near the 2% mid-point. To this end, the bank sets an appropriate level of interest rates. When inflation is too high, the RBNZ will increase interest rates to cool the economy, but the move will also make bond yields higher, increasing investors’ appeal to invest in the country and thus boosting NZD. On the contrary, lower interest rates tend to weaken NZD. The so-called rate differential, or how rates in New Zealand are or are expected to be compared to the ones set by the US Federal Reserve, can also play a key role in moving the NZD/USD pair.

How does economic data influence the value of the New Zealand Dollar?

Macroeconomic data releases in New Zealand are key to assess the state of the economy and can impact the New Zealand Dollar’s (NZD) valuation. A strong economy, based on high economic growth, low unemployment and high confidence is good for NZD. High economic growth attracts foreign investment and may encourage the Reserve Bank of New Zealand to increase interest rates, if this economic strength comes together with elevated inflation. Conversely, if economic data is weak, NZD is likely to depreciate.

How does broader risk sentiment impact the New Zealand Dollar?

The New Zealand Dollar (NZD) tends to strengthen during risk-on periods, or when investors perceive that broader market risks are low and are optimistic about growth. This tends to lead to a more favorable outlook for commodities and so-called ‘commodity currencies’ such as the Kiwi. Conversely, NZD tends to weaken at times of market turbulence or economic uncertainty as investors tend to sell higher-risk assets and flee to the more-stable safe havens.