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The New Zealand Dollar rose after the Reserve Bank of New Zealand (RBNZ) hiked 50bp to 3.5%, in line with market consensus expectations, but signalled it was considering an even larger hike.
"NZD is off the overnight highs, but still outperforming after the RBNZ delivered the 50bp hike expected and considered a larger move," says Adam Cole, Chief Currency Strategist at RBC Capital Markets.
In its statement, the RBNZ noted a need to "continue to tighten monetary conditions at pace".
This stands in contrast to the Reserve Bank of Australia (RBA) which on Tuesday surprised by hiking rates by 25bp, and not 50bp, signalling it was close to ending its hike cycle.
The Australian Dollar fell sharply as a result and investors bet the New Zealand Dollar awaited the same fate.
But, there does appear to be some divergence in thinking opening up between the two antipodean central banks.
Above: NZD is the best-performing major currency on Wednesday.
The "RBNZ also recognised the upward pressure on prices from a weaker NZD," says Cole.
The New Zealand Dollar's recent decline, which is the worst performing major currency of the past month, means the cost of imports will rise, exacerbating inflationary pressures.
This is particularly relevant in the current inflationary cycle which has stemmed from squeezed supply chains and elevated commodity prices.
Therefore, the currency will remain relevant in determining future interest rate moves.
The currency market's reaction to the decision, and guidance, is consistent with a 'hawkish surprise':
The Pound to New Zealand Dollar exchange rate fell back by two-thirds of a percent to 1.9891 at the time of writing, having been as high as 2.0 earlier in the day.
This takes rates offered on bank payments to around 1.9335 and those offered at payment specialists to around 1.9832.
Against the U.S. Dollar, the Kiwi was a third of a percent higher at 0.5747. Against the Aussie Dollar, it was half a percent higher with AUD/NZD at 1.1292.
"GBP/NZD has traded in a circa 12% range since the start of 2022 and despite today’s slide, remains in the top 30% of this range and 2% above its 2-year average," says George Vessey, an analyst at Western Union Business Solutions.
Above: GBP/NZD at daily intervals, showing price action since the start of the year. To better time your payment requirements, consider setting a free FX rate alert here.
The New Zealand Dollar has been heavily sold and therefore the scope for a relief rebound was elevated heading into the RBNZ.
The outlook for the currency will however depend on how global market conditions evolve - they are currently supportive - and where the RBNZ goes next.
Cole notes the market's terminal rate pricing for where the RBNZ's interest rate stops rising has edged down slightly in line with other markets, currently 4.5% around the middle of next year compared to peak rates of 4.7% before the meeting.
For the New Zealand Dollar to rise on a more sustained basis the market would have needed to have at least lifted that terminal rate.
Michael Gordon, Acting Chief Economist at Westpac, says the RBNZ cannot afford to sit back and more hikes are forthcoming.
"Inflation pressures in the local economy remain intense, with strong demand running up against constrained capacity," he says, "the fact that it discussed a 75 basis point hike today suggests that it still sees itself as some way from where it needs to be."
Westpac expects a 4.5% peak in the OCR, with further 50 basis point increases in November and February.