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Markets expect a rate hike in New Zealand next week, leaving the currency exposed if the central bank waits.
Economists warn the New Zealand dollar would likely fall if the Reserve Bank of New Zealand (RBNZ) leaves interest rates unchanged next week, with currency markets already counting on a hike.
"The prospect of OCR hikes has helped underpin the NZD, and an on-hold OCR decision next week would likely sink the kiwi," says Mark Smith, Economist at ASB.
The expectation of higher interest rates has drawn buyers back to the kiwi and stabilised it following a sizeable selloff, so a pause would remove that support at a time when the weak currency is pushing up the cost of imports.
ASB expects annual inflation to reach 4.5% by year-end, well above the RBNZ's 1% to 3% target band.
The NZD trade-weighted index stands at 64.6, around 3.5% below the RBNZ's own September forecast for the fourth quarter, according to ASB, meaning imported inflation is running ahead of what the central bank assumed.
An RBNZ hike would lift the return on New Zealand dollar assets and lend the currency support, the dynamic Pound Sterling Live set out last week.
The pound to New Zealand dollar rate is at 2.3573, with the kiwi near 0.5685 against the U.S. dollar after it ranked among the strongest G10 currencies overnight.
GBP/NZD found buyers at its 21-day moving average at 2.3535 this week, keeping the October highs around 2.3670 in contention, and an RBNZ hold would offer the clearest route to a break above them.
Société Générale expects the RBNZ to move next week.
"While it isn't a 'done deal' in the market's mind that the Bank of Canada and the RBNZ will hike, they are more likely to act than wait," says Kit Juckes, Chief FX Strategist at Société Générale.
"Given the sheer scale of the AUD/NZD rally this year, NZD possibly has the most to gain," he adds.
New Zealand's exporters also have support from dairy, with Global Dairy Trade prices up 2.5% at Tuesday's auction and whole milk powder up 4.4%.
"An RBNZ rate hike next week, coupled with guidance signalling scope for further tightening, would provide the clearest near-term catalyst for NZD/GBP to extend its recovery away from multi-year lows," says Xe in New Zealand.
The Pound Side: A Bank of England Hike is Priced
Sterling has rate support of its own after UK employment rose 102,000 in the three months to August, against expectations for 5,000.
Markets price a 95% chance of a Bank of England hike in early November, which kept GBP/NZD near an 11-year high last week.
ANZ judges the chances of a Federal Reserve hike next week to be underpriced, a risk for the kiwi that sits alongside the RBNZ decision.
Daniella Arcadipane, Senior Currency Specialist at Indigo
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