The RBNZ surprised markets with a pause and the Kiwi sank 1.6%: Why December hike bets may not save it

The US Dollar (USD) capitalized on an unexpected monetary policy pause by the Reserve Bank of New Zealand (RBNZ), which held its Official Cash Rate (OCR) at 2.75% in a narrow 4–3 vote despite widespread market expectations for a 25-basis-points (bps) rate hike. The decision sent the New Zealand Dollar sliding by up to 1.6% against the Greenback, dragging NZD/USD toward the lower boundary of its critical multi-month support area at 0.5560/0.5550. With the RBNZ signaling that further tightening may still be necessary to combat rising fourth-quarter inflation, market attention is focused on whether US Dollar strength will push NZD/USD into a deeper technical breakdown or whether overstretched Fed interest rate expectations will cap further USD gains.

Societe Generale warns NZD/USD breakdown below 0.5560 risks fall toward 0.5480

Analysts at Societe Generale highlight that the RBNZ's decision to leave the OCR unchanged at 2.75% has put severe pressure on the New Zealand Dollar, driving NZD/USD directly into the lower boundary of its multi-month trading range. If buyers fail to defend the critical 0.5560/0.5550 support zone, the pair faces a higher risk of an extended downtrend targeting multi-year lows.

"NZD/USD is challenging the lower boundary of its multi-month range at 0.5560/0.5550, a crucial support zone... A short-term rebound cannot be ruled out; however, the recent pivot high at 0.5710 could act as resistance... If the pair fails to defend the support at 0.5560/0.5550, the risk of a deeper downtrend would increase... In such a scenario, the next objectives could be located at the April 2025 low near 0.5480 and projections at 0.5420."

Commerzbank projects NZD weakness on dovish RBNZ repricing but sees limits to USD gains

Norman Liebke at Commerzbank notes that while the RBNZ surprised markets with a 4–3 vote to pause rates at 2.75%, high headline inflation will likely force a December rate hike. However, with money markets pricing in roughly four rate increases by next September, Liebke sees limited medium-term upside for the Kiwi as those expectations are scaled back, though overextended Fed pricing should prevent an unchecked US Dollar rally.

"The Reserve Bank of New Zealand left its policy rate unchanged at 2.75%, contrary to market expectations... The Kiwi temporarily fell by 1.6% against the USD to almost 0.56. Over the medium term, however, we do not see much upside for the NZD either, given what we consider overly hawkish market expectations... While we continue to expect a rate hike in December, we are more sceptical than the market about the medium-term outlook. As rate-hike expectations are pared back, the Kiwi is therefore likely to weaken. At the same time, we also consider current expectations for the Fed to be too hawkish, which should limit the extent of any NZD depreciation."

Key Takeaway

The RBNZ's unexpected rate pause has reinforced the US Dollar's relative dominance, driving NZD/USD to test pivotal support zone at 0.5560/0.5550. While Societe Generale warns that a failure to hold this area risks opening a technical path down to 0.5480, Commerzbank projects that dovish repricing of RBNZ rate hikes will weigh on the Kiwi but, in the Fed’s case, the bank argues that overstretched hawkish pricing will ultimately constrain the US Dollar's capacity to extend gains significantly further.

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)