Why is the New Zealand Dollar gaining despite lower RBNZ rate hike odds?

NZD/USD could face pressure as cheaper oil softens inflation and scales back expectations of RBNZ rate hikes.
Growing bets on a Fed rate hike could extend gains in the US Dollar Index.
A December rate hike carries a probability of nearly 91%, according to the CME FedWatch Tool.

Gains in NZD/USD remain modest during Wednesday’s Asian session, with the pair trading around 0.5600 after losing over 0.5% the previous day. Potential pressures on the New Zealand Dollar (NZD), however, could limit further upside. The prospect of lower oil prices is helping to contain inflationary pressures, prompting markets to pare back expectations of future interest rate increases by the Reserve Bank of New Zealand (RBNZ).

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

Ongoing coalition talks are also drawing close attention from market participants. After incumbent Finance Minister Nicola Willis failed to retain her parliamentary seat, labour market leaders identified National's Simeon Brown and Labour's Barbara Edmonds as the leading contenders for the Finance Minister post.

Against the New Zealand Dollar, the US Dollar (USD) could find support as the latest US inflation figures fuel expectations of a Federal Reserve (Fed) rate hike in December. Markets now assign approximately a 91% probability to an increase next month, according to the CME FedWatch Tool.

At 0.4% month-on-month in October, the increase in the US Consumer Price Index exceeded the 0.3% forecast, despite moderating from September's 0.6% rise. Excluding food and energy prices, Core CPI advanced 0.3%, maintaining September's pace and surpassing the 0.2% estimate. Annual figures for October were not included by the Bureau of Labor Statistics because of last year's government shutdown.

Does Goolsbee’s warning of a ‘real inflation issue,’ reinforce the hawkish Fed tone and support the Dollar?

An FXS Speechtracker score of 8/10, substantially above the historical average of 6.8/10, marked a notably more hawkish message from Fed’s Goolsbee and highlighted mounting concern over persistent price pressures. Describing the latest CPI as “borderline disturbing,” alongside observations that services inflation was “not coming down” and that there was a “real inflation issue on our hands,” points to increasing unease over sticky inflation and reduced tolerance for upside surprises. By stressing that “everything is always on the table” and that the Federal Reserve “must get inflation down to target”, the remarks reinforce the risk of fresh tightening or a longer-for-longer policy stance. Such a combination generally favours the Dollar while weighing on risk-sensitive currencies.

A 1.69-point increase took the FXS Fed Sentiment Index to 145.61, signalling a decisive move further into hawkish territory, consistent with the elevated FXS Speechtracker score. The reading remains well above the neutral 100 level. Markets are therefore likely to view Goolsbee’s remarks as reinforcing expectations that rates will stay higher for longer, which should support the Dollar and sustain pressure on the Euro, Yen and other low-yielding currencies.

New Zealand Dollar: Frequently Asked Questions

Which factors are the main drivers of the New Zealand Dollar?

Known as the Kiwi, the New Zealand Dollar (NZD) is a familiar currency traded by investors. New Zealand’s economic health and its central bank’s policy broadly determine its value, although several distinctive factors also influence its movements. Among them is China’s economic performance, given that China is New Zealand’s largest trading partner. Weak news from China is likely to imply lower demand for New Zealand’s exports, hurting the economy and, in turn, its currency. Dairy prices are another important influence, as dairy products are New Zealand’s principal export. Higher dairy prices lift export earnings, supporting both the economy and the NZD.

Why do RBNZ policy decisions affect the New Zealand Dollar?

Keeping medium-term inflation within a 1% to 3% range, preferably close to the 2% midpoint, is the Reserve Bank of New Zealand’s (RBNZ) objective. The bank calibrates interest rates accordingly. If inflation becomes too high, the RBNZ raises rates to slow the economy. Higher rates also lift bond yields, making investment in the country more attractive and supporting the NZD. Rate cuts, by contrast, generally weaken the currency. NZD/USD can also be strongly influenced by the rate differential: the gap between actual or expected New Zealand interest rates and those set by the US Federal Reserve.

Why does economic data matter for the New Zealand Dollar’s value?

By helping investors gauge the economy’s condition, New Zealand’s macroeconomic releases can influence the valuation of the New Zealand Dollar (NZD). Strong growth, low unemployment and high confidence indicate a healthy economy, which supports the NZD. Robust economic expansion draws foreign investment and, when 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 push the NZD lower.

How do shifts in global risk appetite affect the New Zealand Dollar?

Risk-on conditions generally favour the New Zealand Dollar (NZD). When investors see limited risks across markets and feel optimistic about growth, the outlook for commodities and so-called ‘commodity currencies’, including the Kiwi, tends to improve. During market turmoil or periods of economic uncertainty, the reverse usually holds: investors sell riskier assets and move towards more stable safe havens, tending to weaken the NZD.