Hawkish Fed rate hike bets bolster US Dollar and weigh on New Zealand Dollar

• Strong US inflation readings and hawkish Fed signals lift the likelihood of a December rate rise, supporting the US Dollar.
• Strong auction demand following preliminary election results pushes New Zealand’s 10-year bond yield down to 4.76%.
• The prospect of the National-led coalition remaining in power could underpin the NZD, with official election results due on 27 November.

Stronger-than-expected US Consumer Price Index (CPI) inflation has reinforced hawkish expectations for the Federal Reserve’s (Fed) policy outlook, keeping the US Dollar (USD) firm. Against that backdrop, NZD/USD is falling for a third successive day, changing hands near 0.5550 during Thursday’s European trading hours.

A December rate rise now carries an 87% probability in market pricing, according to the CME FedWatch Tool, with a nearly 13% chance of a larger 50-basis-point increase. Traders increased their bets after Fed Governor Christopher Waller said earlier this week that he would back a quarter-point rise, or even a half-point increase should inflation worsen.

At the time of writing, New Zealand’s 10-year government bond yield stands at 4.76%, down 3 basis points. Strong demand at auction drove the decline after preliminary election results alleviated concerns about the country’s fiscal outlook.

The possibility that the incumbent National-led coalition could stay in office, as indicated by preliminary election results, provided some support for the New Zealand Dollar (NZD). Such an outcome would likely leave the Reserve Bank of New Zealand’s (RBNZ) exclusive focus on inflation and existing government spending policies intact. Nevertheless, uncertainty over the political outlook persists ahead of the official results on 27 November.

Political developments remain pivotal to New Zealand’s policy outlook, according to analysts at Brown Brothers Harriman, who note that "New Zealand's ruling center-right coalition holds a one-seat majority following Sunday’s election, with final results due November 27." They emphasise the contrast between the incumbent National Party-led coalition, which "wants to stick to the RBNZ’s sole price stability mandate which has been in place since December 2023," and the Labour Party, which "ran on a proposal to return to a dual inflation-employment mandate." This marked difference over the central bank’s framework is viewed as an important consideration in market pricing of the policy trajectory.