New Zealand Dollar depreciates as hawkish Fed rate hike bets lift US Dollar
- Hot US inflation and hawkish Fed signals boost December rate hike probabilities, strengthening the US Dollar.
- New Zealand’s 10-year bond yield drops to 4.76% amid strong auction demand following preliminary election results.
- Potential continuity for the National-led coalition could support the NZD, though official election results await November 27.
NZD/USD loses ground for the third consecutive day, trading around 0.5550 during European hours on Thursday. The currency pair depreciates as the US Dollar (USD) holds firm amid growing hawkish sentiment surrounding the Federal Reserve's (Fed) policy outlook, fueled by hotter-than-expected US Consumer Price Index (CPI) inflation data.
Traders have ramped up bets on a December rate hike after Fed Governor Christopher Waller indicated earlier this week that he would support a quarter-point increase, or even a half-point move if inflation worsens. According to the CME FedWatch Tool, markets are now pricing in an 87% probability of a December rate hike, alongside nearly a 13% chance of a larger 50-basis-point increase.
In New Zealand, the 10-year government bond yield is down 3 basis points to 4.76% at the time of writing, driven by strong auction demand after preliminary election results eased concerns over the country's fiscal outlook.
Meanwhile, preliminary election results indicating that the incumbent National-led coalition could retain power offered some support for the New Zealand Dollar (NZD), as this outcome would likely preserve the Reserve Bank of New Zealand’s (RBNZ) sole focus on inflation alongside current government spending policies. However, the political picture remains uncertain ahead of the official results on November 27.
Analysts at Brown Brothers Harriman highlight that political developments remain central to the New Zealand policy outlook, noting that "New Zealand's ruling center-right coalition holds a one-seat majority following Sunday’s election, with final results due November 27." They stress that the incumbent coalition led by the National Party "wants to stick to the RBNZ’s sole price stability mandate which has been in place since December 2023," in contrast to the Labour Party, which "ran on a proposal to return to a dual inflation-employment mandate." This clear divergence on the central bank’s framework is seen as an important backdrop for market pricing of the policy path.
New Zealand Dollar FAQs
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.
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.
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.
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.
