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The New Zealand Dollar can build on this week's gains, say analysts, but a word of warning from history: rate hikes aren't always helpful.
The New Zealand dollar is today's top performing major currency and is set to end the week as the second-best, if the momentum provided by the midweek RBNZ decision continues.
That momentum was stoked Thursday by RBNZ Governor Breman, who spoke to Radio New Zealand this morning "and emphasised a stronger hiking bias than what was apparent in the statement and press conference yesterday," says Michael Tang, analyst at Commonwealth Bank.
Breman told the broadcaster that persistent inflation is the central bank's chief concern, something markets interpreted as further confirmation more rate hikes are coming.
"What we are concerned about is that, since the conflict did persist for such a long time and as we can see over the past 24 hours, unfortunately, it's not gone yet. That means there's a risk this will become embedded. Our job is to ensure that it's not allowed to keep inflation too high for too long," Breman said on the show.
The comments follow Wednesday's decision by the RBNZ to lift the official cash rate by a quarter of a percentage point, the first hike in more than three years.
The FX reaction suggests the market saw the prospect of rates staying on hold, while the central bank also signalled that it could raise rates again.
The New Zealand Dollar rallied in response to what was judged to be the 'hawkish' steer.
More NZD Gains Are Possible
Barclays thinks the New Zealand currency's advance has further to run.
"A lower starting point for policy rates and RBNZ guidance for a total of 75bp of hikes by year-end generate some scope for NZD appreciation in coming months," says the bank in recent currency research note.
Upside growth surprises in the fourth quarter of 2025 and the first quarter of 2026 support that outlook, although Barclays cautions these need to be sustained given a starting point of a deeply negative output gap.
The bank nevertheless pencils in further underperformance against the Australian Dollar, noting New Zealand does not share Australia's AI-related terms of trade boost.
HSBC says the New Zealand Dollar has the most rate hikes priced in over the year ahead of any major currency, as measured by the roughly 140 basis point spread between one-year forward swap rates and the current policy rate.
Crucially, the gap between what markets expect over the next year and their estimate of the neutral rate stands at around 100 basis points, second only to the Japanese Yen.
"The path priced for the RBNZ therefore allows the currency to close rate differentials with other G10 currencies without too much risk of straying above neutral. The NZD possesses the best of both worlds," says HSBC.
But History Warns Rate Hikes Don't Always Help
To be sure, rate hike pricing for the NZD is rich, and there are some that warn this does not always necessarily deliver currency outperformance.
HSBC reminds us that "not all episodes of a hawkish RBNZ – and the concurrent currency impact – are equal."
The RBNZ is now the most hawkishly-priced central bank in G10, a crown it also wore in 2021-22 as it pivoted aggressively after the Covid pandemic.
"Back then heavy was the head that wore the crown," says HSBC, noting the currency failed to capitalise on hawkish RBNZ pricing and NZD/USD fell around 10% across 2022.
Bank of New York (BNY) is out with research on Thursday, saying that hikes are not always necessarily good for a currency.
In a note out today, analysts warn that where hikes penalise growth, the currency can underperform.
"If monetary policy is seen as suboptimal for the economy's needs, asset inflows are likely to be weak in the first place. Conventional relationships between monetary policy and currency performance are breaking down," says Geoffrey Yu, Senior EMEA Market Strategist at Bank of New York.
Already, we are seeing that story play out for the euro which has failed to benefit from a June rate hike and a 'hawkish' repricing in market expectations such that two more hikes are now expected.
With the NZD near the lows against some key currencies (for example, the pound), we wonder whether this might become a more prominent theme in the coming months if Kiwi inflation remains high but growth deflates.
