Rabobank Senior FX Strategist Jane Foley highlights that stronger-than-expected New Zealand Consumer Price Index (CPI) and a hawkish Reserve Bank of New Zealand (RBNZ) stance have driven aggressive market pricing for policy tightening and supported the New Zealand Dollar (NZD). Foley notes near-term downside risks for NZD/USD from safe-haven Dollar demand and softer RBNZ expectations, but still anticipates a moderate NZD/USD recovery later this year as further Federal Reserve (Fed) rate cuts loom.

Hawkish RBNZ versus Fed cut risks

"For now, however, the stickiness of domestically driven inflation clearly has the market worried. New Zealand headline Q1 CPI inflation registered a stronger than expected 3.1% y/y, in line with the previous release."

"On the back of this week’s release of stronger than expected Q1 New Zealand CPI inflation data and the hawkish tone of the RBNZ, the market is priced for over 100 bps of rate hikes on a 1-year view. This is far more aggressive than Rabobank’s forecasts."

"Although the RBNZ has not announced any policy change in recent months, there has been a noticeable tightening of monetary conditions stemming from the move higher in market rates and the stronger performance of the NZD. Since the market has already done this heavy lifting, it may eventually mean that the RBNZ can afford to raise rates a little less than some market hawks currently expect."

"An escalation in the Iran war would likely lead to another bout of safe haven USD buying and a dip in NZD/USD near-term, while a moderation in RBNZ rate hike expectations could weigh on the outlook for NZD/USD on a 1-to-3-month view. That said, we expect the currency pair to edge moderately higher later in the year on risk of further Fed rate cuts."

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor.)