BNY’s EMEA Macro Strategist Geoff Yu argues that NZD should not be treated as a simple proxy for AUD despite renewed G10 policy divergence after the RBA hike. Markets price RBNZ hikes in the second half of the year, but New Zealand’s growth outlook has been revised lower and futures still imply a more cautious path than Australia, limiting NZD’s valuation upside versus AUD.

RBNZ path seen more cautious than RBA

"For now, the Reserve Bank of New Zealand (RBNZ) is expected to be the next mover, with full hikes priced in for the second half of the year. However, FX markets should be careful in viewing NZD as an ersatz AUD and anticipate stronger valuations."

"Although the December 2026 futures contract is anticipating 3% rates, the trajectory versus Australia is very different: pricing for end-2026 remains well below levels seen last year and has barely moved since December. The trajectory for New Zealand interest rate futures suggests that markets had to revise their growth expectations for New Zealand materially lower last year and remain cautious on the medium-term outlook."

"New Zealand inflation is also quite elevated, which supports the pivot toward tightening. However, through the latter end of the forecast horizon, New Zealand’s inflation path is expected to converge back to target sooner, and there are questions over steady-state levels for growth and price levels."

"Some light fiscal tightening and weaker external demand have opened up a large output gap in New Zealand, requiring a stronger monetary offset. On a forward-looking basis, as its economy is smaller and prone to greater volatility in output gaps, pre-emptive and aggressive tightening may not be the optimal approach."

"From liquidity to volatility-adjusted returns, NZD is unlikely to see a valuation lift equivalent to the AUD."

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