RBNZ rate hike expectations lift New Zealand Dollar

25 bps RBNZ hike expectations lift the New Zealand Dollar. Traders anticipate a rise to 3% as inflation remains high.
A firm US Dollar limits NZD/USD gains as the Fed policy meeting approaches.
89.5% odds of an October Fed hold are priced in, with markets expecting hikes to wait until December.

0.5690 is the approximate level for NZD/USD in Tuesday’s European session. The pair is recovering from modest losses the previous day. Supporting the New Zealand Dollar (NZD), traders expect the Reserve Bank of New Zealand (RBNZ) to raise interest rates by 25 basis points to 3% on Wednesday. That would follow increases in July and September, with higher oil prices driving elevated inflation.

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

Caution ahead of Wednesday’s interest rate decision from the US Federal Reserve (Fed) is keeping the US Dollar (USD) firm. This could limit further advances in NZD/USD.

An October pause followed by a possible December increase remains the financial market’s expected Federal Reserve path. The CME FedWatch Tool puts the market-implied probability of unchanged rates at the October policy meeting at 89.5%, while pricing assigns an 82.3% chance to a December increase.

For Heather Long, chief economist at Navy Federal Credit Union, inflation remains the central concern: “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 rate move, however, Heather added, “given that it’s right before an election,” and concluded, “they won’t hike in October.”

Pre-FOMC positioning supports Dollar

Chair Kevin Warsh’s renewed commitment to tackling inflation is being read by the forward-looking FX market as “reinforcing the structural floor for the Dollar,” according to ING strategists. They note that “pre-FOMC positioning may also be kicking in,” and add, “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.

New Zealand Dollar: Key Questions

New Zealand Dollar: Main market drivers

New Zealand’s economic health and central bank policy broadly shape the value of the New Zealand Dollar (NZD). Known as the Kiwi, it is a familiar currency among investors, but several specific factors also influence its movements. China’s economic performance matters because it is New Zealand’s largest trading partner. Negative developments in China are likely to reduce demand for New Zealand exports, weighing on the economy and, in turn, the currency. Dairy prices are another driver, given the industry’s position as New Zealand’s main export sector. Higher dairy prices increase export earnings, supporting both the economy and NZD.

RBNZ policy: The effect on the New Zealand Dollar

1% to 3% is the Reserve Bank of New Zealand’s (RBNZ) medium-term inflation target range, with a focus on keeping inflation close to the 2% midpoint. The bank sets interest rates at a level intended to achieve and maintain that objective. When inflation becomes too high, the RBNZ raises rates to slow the economy. Higher rates also lift bond yields, making investment in New Zealand more attractive and supporting NZD. Rate cuts, by contrast, tend to weaken the currency. NZD/USD can also be strongly influenced by the interest rate differential: the actual or expected gap between New Zealand rates and those set by the US Federal Reserve.

Economic data: Implications for the New Zealand Dollar

New Zealand’s macroeconomic releases help investors assess the economy and can alter the valuation of the New Zealand Dollar (NZD). Strong growth, low unemployment and high confidence signal an economy that is supportive of NZD. Robust growth draws foreign investment. If accompanied by elevated inflation, that strength may also prompt the Reserve Bank of New Zealand to raise interest rates. Weak economic figures, on the other hand, are likely to put downward pressure on NZD.

Risk sentiment: The Kiwi’s response

During risk-on periods, the New Zealand Dollar (NZD) typically appreciates as investors see limited risks across markets and take an optimistic view of growth. Such conditions generally improve the outlook for commodities and so-called ‘commodity currencies’, including the Kiwi. Market turbulence or economic uncertainty tends to have the opposite effect. Investors usually sell higher-risk assets in favour of more stable safe havens, leaving NZD weaker.