New Zealand Dollar stabilises near 0.5550 as US Dollar buying pauses

• Around 0.5550, NZD/USD trades sideways as its retreat from the 0.5650 region slows.
• With a quarter-point Fed rate increase in October priced in by investors, the US Dollar pauses.
• Kiwi gains are likely to remain constrained as Fed and RBNZ monetary policy paths move further apart.

The year-to-date low of 0.5527 remains within reach as the New Zealand Dollar (NZD) trades broadly unchanged against the US Dollar (USD) on Thursday. Following another rejection around 0.5650 and a reversal over the past two days, NZD/USD is holding on to its losses and searching for direction near the bottom of its four-week trading range.

Tuesday’s strong US Consumer Price Index (CPI) readings reinforced expectations that the Federal Reserve (Fed) will raise interest rates by at least a quarter point at its December meeting. That has helped the US Dollar outperform its peers this week.

With Fed officials having backed that assessment, further hawkish comments are likely later on Thursday. Several US central bank policymakers are due to make public appearances during the day. Some have already voiced concerns over elevated price pressures and backed additional monetary tightening in December.

BBH Warns: "The USD might have run too far, too fast"

A note of caution comes from Brown Brothers Harriman’s Elias Haddad, who says that “the USD rally may have run too far, too fast.” In his assessment, “USD has overshot the level implied by rate differentials, limiting the scope for further gains in the near-term.”

Expectations for a “jumbo 50bps fed funds rate hike in December” are also likely to moderate, Haddad argues, because they “will likely be constrained by stagnant US real wages and the resulting headwind to consumption spending,” pointing to possible repositioning in the USD over the coming days.

A narrow victory for the ruling centre-right coalition in last weekend’s election eased fears of a spell of political uncertainty, lending the New Zealand Dollar some support at the start of the week. Even so, it did not reverse the currency’s negative trend, which began when the Reserve Bank of New Zealand unexpectedly left interest rates unchanged in late October.

As New Zealand is a net crude oil importer, lower oil prices offer its economy some relief. However, they also strengthen the case for the RBNZ’s doves to leave rates unchanged, widening the monetary policy gap with the Fed.