New Zealand Dollar rises on RBNZ rate hike expectations

New Zealand Dollar gains as traders expect a RBNZ 25 bps rate hike to 3% amid high inflation.
NZD/USD upside is capped by a resilient US Dollar ahead of the upcoming Fed policy meeting.
Markets project an 89.5% chance the Fed holds rates steady in October, delaying hikes until December.

Akhtar Faruqui FXStreet

NZD/USD gains ground after posting modest losses the previous day, trading around 0.5690 during European hours on Tuesday. The pair appreciates as the New Zealand Dollar (NZD) gains ground as traders expect the Reserve Bank of New Zealand (RBNZ) to hike interest rates by 25 basis points to 3% on Wednesday, following rate increases in July and September, amid high inflation driven by higher oil prices.

The upside of the NZD/USD pair could be restrained as the US Dollar (USD) remains stronger, driven by market caution ahead of looming interest rate decisions by the US Federal Reserve (Fed) due on Wednesday.

Financial markets anticipate that the Federal Reserve will keep interest rates unchanged at its upcoming October meeting before potentially pursuing another rate hike in December. According to the CME FedWatch Tool, market pricing currently reflects an 89.5% probability of a rate pause at the October policy meeting, alongside an 82.3% chance of a rate increase in December.

Heather Long, chief economist at Navy Federal Credit Union, said that “Inflation is still the No. 1 problem in the US economy, and there are a lot of signs it is getting more broad-based.” “For consumers, it means really high borrowing costs for the foreseeable future.” However, “given that it’s right before an election,” Heather added, “they won’t hike in October.”

Dollar support underpinned as FOMC positioning builds

ING strategists observe that “pre-FOMC positioning may also be kicking in,” with the forward-looking FX market interpreting Chair Kevin Warsh’s reiteration of inflation commitments as “reinforcing the structural floor for the Dollar.” They add that, “as discussed in our preview, we sympathise with this view and expect a broadly supported Dollar this week,” suggesting the currency is likely to remain underpinned into the FOMC decision.

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.

Author

Akhtar Faruqui

FXStreet

Akhtar Faruqui is a Forex Analyst based in New Delhi, India. With a keen eye for market trends and a passion for dissecting complex financial dynamics, he is dedicated to delivering accurate and insightful Forex news and analysis.

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