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

December rate hike expectations rise as strong US inflation and hawkish Fed signals lend support to the US Dollar.
4.76%: New Zealand’s 10-year bond yield declines as robust auction demand follows preliminary election results.
Continuity under the National-led coalition could underpin the NZD, with official election results due on November 27.

NZD/USD trades near 0.5550 during Thursday’s European session. The pair is declining for a third straight day as the US Dollar (USD) remains resilient. Stronger-than-expected US Consumer Price Index (CPI) inflation has reinforced hawkish expectations for the Federal Reserve’s (Fed) policy outlook.

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

An 87% probability of a December rate hike is now priced into markets, according to the CME FedWatch Tool, alongside nearly a 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 deteriorate.

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 prospect of the incumbent National-led coalition remaining in power provided some support for the New Zealand Dollar (NZD). Preliminary election results pointed to that possibility, which would likely maintain 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.

For analysts at Brown Brothers Harriman, political developments remain pivotal to New Zealand’s policy outlook. They note that "New Zealand's ruling center-right coalition holds a one-seat majority following Sunday’s election, with final results due November 27." The analysts 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." This sharp difference over the central bank’s framework is viewed as a significant backdrop to market pricing of the policy trajectory.

New Zealand Dollar: Key Questions Answered

New Zealand Dollar: Main Market Drivers

New Zealand’s economic performance and central bank policy broadly shape the value of the New Zealand Dollar (NZD), a widely recognised traded currency also called the Kiwi. Several more specific influences can also move it. China, New Zealand’s largest trading partner, is one such factor: weakness in the Chinese economy is likely to reduce demand for New Zealand exports, weighing on the domestic economy and its currency. Dairy prices are another important driver because dairy is New Zealand’s main export industry. Higher prices lift export earnings, supporting both economic activity and the NZD.

RBNZ Decisions: Implications for the New Zealand Dollar

The Reserve Bank of New Zealand (RBNZ) targets medium-term inflation within a 1% to 3% range, seeking to keep it close to the 2% midpoint. Interest rates are set at a level consistent with that objective. If inflation is excessive, the RBNZ raises rates to restrain economic activity. Higher rates also lift bond yields, making investment in New Zealand more attractive and supporting the NZD. Rate cuts, by contrast, generally put pressure on the currency. For NZD/USD, another key influence is the interest rate differential: the gap between actual or expected New Zealand rates and those set by the US Federal Reserve.

Economic Data: Implications for the New Zealand Dollar

New Zealand’s macroeconomic releases provide essential insight into economic conditions and can affect the valuation of the New Zealand Dollar (NZD). Strong growth, low unemployment and elevated confidence signal a healthy economy, a supportive backdrop for the currency. Rapid economic expansion attracts overseas investment. If accompanied by high inflation, it may also prompt the Reserve Bank of New Zealand to raise interest rates. Weak data, on the other hand, are likely to weigh on the NZD.

Risk Sentiment: Implications for the New Zealand Dollar

Risk appetite generally supports the New Zealand Dollar (NZD). When investors see limited risks across markets and are upbeat about growth, the outlook for commodities and ‘commodity currencies’ such as the Kiwi tends to improve. During market turmoil or economic uncertainty, the reverse typically applies: investors sell riskier assets in favour of more stable safe havens, and the NZD tends to decline.