Expectations of future RBNZ rate hikes lift the New Zealand Dollar

NZD/USD advanced after the PBOC left its benchmark rates steady at 3.00% and 3.50%.
Expectations of an RBNZ rate increase remain elevated as a key inflation release approaches.
A softer USD lent support to the pair, with markets anticipating that the Fed would hold rates steady in October.

Gains in NZD/USD continued for a fourth straight day, taking the pair to around 0.5690 in Tuesday’s European session. The advance came as the New Zealand Dollar (NZD) remained in negative territory after the People’s Bank of China (PBOC) announced its latest interest rate decision. China’s central bank left its benchmark Loan Prime Rates (LPRs) on hold on Tuesday, retaining the one-year LPR at 3.00% and the five-year rate at 3.50%.

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

A third successive rate increase next week is largely priced into markets, a move that would take the policy rate to 3.00%. Expectations of subsequent hikes point to rates reaching 3.75% or more next year, substantially above the Reserve Bank of New Zealand’s (RBNZ) estimate of 3.20%. Chief Economist Paul Conway said last week that the late-October decision was still open. While the central bank continued to see an increase in the official cash rate as the most likely next step, he noted that its timing had not been settled. The forthcoming inflation report will therefore be central to judging whether additional tightening is justified.

Weakness in the US Dollar (USD) also helped NZD/USD move higher, as expectations grew that the Federal Reserve (Fed) would keep interest rates on hold. Last week, Fed Chair Kevin Warsh voiced confidence in the US economy’s resilience but stopped short of giving specific guidance on when future rate changes might occur or how likely they were.

Fed funds futures traders anticipate no change in rates at the central bank’s October policy meeting, according to the CME FedWatch tool. For December, however, they are pricing in a 93.5% chance of a rate increase.

Is the Dollar rally fading as TD Securities spots signs of topping?

The Dollar’s recent advance appears to be meeting resistance as momentum weakens, TD Securities’ team noted, observing that “after a month of relentless rally, the USD shows signs of topping,”

New Zealand Dollar: Common Questions

Which factors are the main drivers of the New Zealand Dollar?

Investors widely trade the New Zealand Dollar (NZD), commonly called the Kiwi. New Zealand’s economic health and its central bank’s policy broadly determine the currency’s value, although several distinctive influences also affect its movements. China’s economic performance often drives the Kiwi, given that China is New Zealand’s largest trading partner. Adverse developments in the Chinese economy 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 on NZD, as dairy is New Zealand’s main export industry. When dairy prices are high, export earnings rise, supporting both the economy and the NZD.

How is the New Zealand Dollar affected by RBNZ decisions?

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 sets interest rates at a level suited to achieving that goal. If inflation is excessive, the RBNZ raises rates to slow economic activity. Higher rates also lift bond yields, making investment in the country more attractive and thereby supporting NZD. Lower interest rates, by contrast, generally weigh on the currency. NZD/USD can also be strongly influenced by the rate differential: the gap between actual or expected interest rates in New Zealand and those set by the US Federal Reserve.

What effect do economic releases have on the New Zealand Dollar?

New Zealand’s macroeconomic releases help investors gauge the economy’s condition and can affect the valuation of the New Zealand Dollar (NZD). Robust growth, low unemployment and strong confidence underpin a healthy economy, which supports NZD. Rapid economic growth draws foreign investment and, when accompanied by high inflation, may prompt the Reserve Bank of New Zealand to raise interest rates. Weak economic readings, on the other hand, are likely to put downward pressure on NZD.

How do shifts in market risk appetite affect the New Zealand Dollar?

During risk-on phases, the New Zealand Dollar (NZD) generally appreciates as investors see limited risks across markets and take an optimistic view of growth. Such conditions usually improve the outlook for commodities and the so-called ‘commodity currencies’, including the Kiwi. Market turmoil or economic uncertainty tends to have the opposite effect on NZD, as investors typically sell riskier assets and seek the relative stability of safe havens.