US Dollar strengthens on hawkish Fed rate hike bets as New Zealand Dollar weakens

The US Dollar gains support as elevated US inflation and hawkish Fed signals increase the likelihood of a December rate hike.
New Zealand’s 10-year bond yield retreats to 4.76% as robust auction demand follows preliminary election results.
The NZD could find support if the National-led coalition stays in power, although official election results are not due until November 27.

Pressure on NZD/USD persists for a third straight day, with the pair trading near 0.5550 in Thursday’s European session. Underpinning the decline is a resilient US Dollar (USD), as stronger-than-expected US Consumer Price Index (CPI) inflation data reinforces hawkish expectations for the Federal Reserve’s (Fed) policy outlook.

TMGM Analysis: Financial Market News, Economic Calendar & Market Insights

Expectations of a December rate hike have strengthened since Fed Governor Christopher Waller said earlier this week that he would back a quarter-point increase, or even a half-point move should inflation deteriorate. The CME FedWatch Tool now shows markets assigning an 87% probability to a December rate hike, along with a nearly 13% chance of a larger 50-basis-point increase.

Robust auction demand has pushed New Zealand’s 10-year government bond yield 3 basis points lower to 4.76% at the time of writing. The demand followed preliminary election results that reduced worries about the country’s fiscal outlook.

Some support for the New Zealand Dollar (NZD) came from preliminary election results suggesting that the incumbent National-led coalition could remain in power. Such an outcome would likely maintain both the Reserve Bank of New Zealand’s (RBNZ) exclusive focus on inflation and existing government spending policies. Political uncertainty nevertheless persists, with official results due on November 27.

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

New Zealand Dollar: Key Questions Answered

Which Factors Shape the New Zealand Dollar’s Performance?

Widely traded by investors, the New Zealand Dollar (NZD) is also referred to as the Kiwi. The strength of New Zealand’s economy and its central bank’s policy broadly underpin the currency’s value, but several distinctive influences also affect its movements. As China is New Zealand’s largest trading partner, developments in the Chinese economy tend to influence the Kiwi. Weak news from China is likely to signal reduced demand for New Zealand’s exports, weighing on both the economy and the currency. Dairy prices are another important driver, given that dairy is New Zealand’s principal export. Higher dairy prices lift export earnings, supporting the economy and, in turn, the NZD.

Why Do RBNZ Decisions Matter for the New Zealand Dollar?

Keeping inflation within a 1% to 3% range over the medium term, and close to the 2% midpoint, is the Reserve Bank of New Zealand’s (RBNZ) objective. The bank sets interest rates at a level suited to that goal. When inflation runs too high, the RBNZ raises rates to slow economic activity. Higher rates also lift bond yields, making investment in the country more attractive and thereby supporting the NZD. Rate reductions, by contrast, generally weigh on the currency. NZD/USD can also be strongly influenced by the interest rate differential: the gap between actual or expected New Zealand rates and those set by the US Federal Reserve.

What Does Economic Data Mean for the New Zealand Dollar’s Value?

The New Zealand Dollar’s (NZD) valuation can respond to domestic macroeconomic releases, which provide important evidence of the economy’s health. Robust growth, low unemployment and strong confidence indicate an economy that is supportive of the NZD. Rapid economic expansion draws foreign investment and, if accompanied by elevated inflation, may prompt the Reserve Bank of New Zealand to raise interest rates. Weak economic readings, on the other hand, are likely to lead to NZD depreciation.

When Does Market Risk Sentiment Help or Hurt the New Zealand Dollar?

An appetite for risk generally supports the New Zealand Dollar (NZD). During these risk-on periods, investors see broader market risks as limited and are optimistic about growth, usually improving the outlook for commodities and so-called ‘commodity currencies’, including the Kiwi. Market turmoil or economic uncertainty tends to have the opposite effect: investors sell higher-risk assets in favour of more stable safe havens, typically weakening the NZD.