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Rising bond yields leave the high-beta New Zealand dollar exposed, but a hawkish RBNZ offers a route back.
MUFG is maintaining a cautious view on the New Zealand dollar after it ended September as the worst performer in the G10 currency complex.
"High-beta FX will be more vulnerable in a climate where yields are rising sharply. There are increased risks of more challenging financial market conditions over the coming months that would like see NZD underperform," says MUFG in its October FX outlook.
The pound to New Zealand dollar exchange rate is at 2.3555 and the New Zealand dollar to U.S. dollar rate is at 0.5622.
The NZD weakened considerably through September, driven in part by higher US interest rates, says ANZ.
US 10-year Treasury yields are trading near multi-decade highs as markets price further Federal Reserve hikes.
That leaves the kiwi short on yield appeal with New Zealand's Official Cash Rate at 2.75%.
"Low outright yields and heightened geopolitical risks remain key NZD headwinds," says ASB.
ASB adds that a weaker NZD and higher fuel prices could delay the return of New Zealand inflation to below 3% until the second half of 2027.
Credit Agricole Sees the RBNZ Forced to Hike
"Gradual withdrawal of stimulus by the RBNZ is a near-term weight on the NZD, but the central bank is underestimating upside inflation risks and will be forced to re-accelerate rate hikes," says Credit Agricole.
Westpac finds domestic price pressures running hotter than the RBNZ projects, led by electricity charges and local council rates that respond little to interest rate changes.
"That ongoing firmness in domestic inflation is also a reason why we expect the RBNZ will ultimately need to raise the OCR by more than they assumed in their September policy Statement," says Westpac.
Pump prices have risen around 50 cents per litre in a month, according to ASB.
"Near-term inflation will remain elevated as a result, and we expect the RBNZ to respond," says ASB.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
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Talk to a specialistA hawkish RBNZ underpins the more constructive NZD/USD forecasts:
• Westpac: 0.61 in three months, 0.64 in six months, 0.65 in 12 months
• Credit Agricole: 0.58 in three months, 0.63 in 12 months
MUFG sees more limited tightening, assuming one further hike to 3.00% this quarter and describing market pricing for a 4.00% OCR as overdone.
The RBNZ's September projections point to a pause at the 28 October policy review and a hike to 3.00% in December.
Westpac reads the latest NZIER business survey as giving the RBNZ no reason to bring that hike forward.
"There is certainly no smoking gun in this report that would demand that the RBNZ abandon the "pause" strategy communicated at the September MPS," says Michael Gordon, economist at Westpac.
That makes the September quarter CPI release on 22 October the next test for the RBNZ and the New Zealand dollar.
Daniella Arcadipane, Senior Currency Specialist at Indigo
Moving a life-changing sum abroad? You won’t be doing it alone.
One specialist explains every step in plain English and stays with it until the money lands. FCA authorised, FRN 594433.
Talk to a specialist
