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New Zealand Dollar traders factor in a third consecutive RBNZ rate rise
- NZD/USD closes below 0.5700 after stalling just above it for a fourth session.
- Kiwi weakens despite TD Securities forecasting three RBNZ hikes to 3.50%.
- RBNZ expected to lift rates to 3.00% on Wednesday before the election.
Three rate rises are now forecast by TD Securities, which has abandoned its call for the Reserve Bank of New Zealand (RBNZ) to pause. Yet NZD/USD declined on Monday as traders bought dollars ahead of Wednesday's Fed decision. For a fourth consecutive session, the pair stalled just above 0.5700 before closing below that mark.
A quarter-point RBNZ increase to 3.00% is assigned a probability of nearly 90% by traders, while 22 of 27 economists surveyed by Reuters anticipate the move. Since that increase is already priced in, the argument for the Kiwi depends on subsequent policy decisions. A further rise to 3.25% in December is forecast by nine of 23 economists in the same survey.
At 3.7%, third-quarter inflation eased below the RBNZ's own forecast of 3.9%. Economists nevertheless expect a rate increase, anticipating that fuel costs and a weaker Kiwi will push inflation back above 4% in the fourth quarter. The currency's weakness therefore forms part of the argument for tighter policy.
RBNZ and Fed decisions lead the calendar
An increase in the cash rate from 2.75% to 3.00% is forecast when the RBNZ releases its decision and Monetary Policy Review at 01:00 GMT on Wednesday. The announcement falls ten days before New Zealand's 7 November election. The central bank's own rate projection spans the December and February meetings underpinning TD's forecast.
On Wednesday, the Fed is expected to leave its 3.75%-4.00% range unchanged. Its statement is scheduled for 18:00 GMT, followed by Fed Chair Warsh's press conference. The range already exceeds the 3.00% level anticipated for the RBNZ. Before those decisions, Tuesday's September durable goods orders are forecast to show a 0.6% increase.
NZD/USD recovery stalls below the 50-day EMA
Below the 50-day Exponential Moving Average (EMA), NZD/USD's recovery from its 14 October low just above 0.5550 has run out of momentum. The 200-day EMA sits just below 0.5800. About a fifth of the recovery was reversed in Monday's decline, while daily momentum is overbought for the first time since late July.
Daily chart: NZD/USD
New Zealand Dollar: Key Questions Answered
The health of New Zealand's economy and its central bank's policy broadly determine the value of the New Zealand Dollar (NZD), a familiar currency among investors that is also called the Kiwi. Several more specific influences can affect it too. As China is New Zealand's largest trading partner, developments in the Chinese economy tend to influence the Kiwi. Negative Chinese economic news is likely to reduce New Zealand's exports to China, weighing on the domestic economy and, in turn, the currency. Dairy prices are another driver, given that dairy products are New Zealand's main export. Higher prices increase export earnings, supporting both the economy and NZD.
Maintaining inflation between 1% and 3% over the medium term, with an emphasis on the 2% midpoint, is the Reserve Bank of New Zealand's (RBNZ) objective. The bank sets interest rates at a level suited to that aim. If inflation becomes too high, it raises rates to slow the economy. Higher rates also lift bond yields, making investment in New Zealand more attractive and thereby supporting NZD. Rate reductions, by contrast, generally weaken the currency. Another important influence on NZD/USD is the interest rate differential: the gap between New Zealand's actual or expected rates and those set by the US Federal Reserve.
By helping investors gauge the economy's condition, New Zealand's macroeconomic releases can affect the valuation of the New Zealand Dollar (NZD). Strong growth, low unemployment and robust confidence signal a healthy economy, which supports NZD. Rapid economic growth 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 lead to NZD depreciation.
When investors view wider market risks as low and feel optimistic about growth, the resulting risk-on environment tends to support the New Zealand Dollar (NZD). Such conditions usually improve the outlook for commodities and so-called ‘commodity currencies’, including the Kiwi. In periods of market turmoil or economic uncertainty, the reverse tends to apply: investors sell riskier assets in favour of more stable safe havens, leaving NZD weaker.
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