New Zealand Dollar gains as RBNZ rate hike expectations build

• With inflation elevated, expectations of a 25 bps RBNZ rate rise to 3% lift the New Zealand Dollar.
• A firm US Dollar limits gains in NZD/USD as the next Fed policy meeting approaches.
• An October Fed rate hold carries an 89.5% market-implied probability, with further tightening deferred until December.

Expectations of a 25 basis point interest rate rise to 3% by the Reserve Bank of New Zealand (RBNZ) on Wednesday are supporting the New Zealand Dollar (NZD). Following modest losses the day before, NZD/USD recovers to trade near 0.5690 during Tuesday’s European session. Traders anticipate the increase after rises in July and September, as higher oil prices fuel elevated inflation.

However, further gains in NZD/USD could be limited by the continued strength of the US Dollar (USD). Caution ahead of Wednesday’s interest rate decision from the US Federal Reserve (Fed) is supporting the US currency.

An unchanged interest rate at the Federal Reserve’s forthcoming October meeting remains the financial markets’ expectation, with a further increase possible in December. The CME FedWatch Tool puts the market-implied probability of an October policy pause at 89.5%, while pricing indicates an 82.3% chance of a December rate rise.

Describing the inflation backdrop, 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 added: “For consumers, it means really high borrowing costs for the foreseeable future.” On the timing of a move, however, Heather said, “given that it’s right before an election,” and added, “they won’t hike in October.”

Dollar finds support as positioning builds ahead of FOMC

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.” Setting out their own stance, they add 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 ahead of the FOMC decision.