Key Moments
- NZD/USD traded around 0.5615 in early Asian dealing as the US Dollar softened alongside easing US Treasury yields.
- Fed officials signaled more tightening is likely needed to curb inflation, but left room for a pause at the upcoming October meeting.
- Westpac expects the RBNZ to keep the OCR at 2.75% this month, followed by a 25 bps hike in December and two additional increases in early 2027.
NZD/USD Supported As US Dollar Eases
The New Zealand Dollar advanced modestly against the US Dollar in early Asian trade on Friday, with NZD/USD edging up toward 0.5615. The move higher came as the US Dollar weakened against the Kiwi while US Treasury yields pulled back. Market participants continued to assess persistent inflation risks and the trajectory of Federal Reserve policy. The Michigan Consumer Sentiment Index for October is scheduled for release later on Friday and is in focus for additional clues on the US outlook.
Fed Officials Signal Further Tightening But Allow For October Pause
The article notes that the Federal Reserve raised its policy rate by a quarter of a percentage point in a unanimous decision last month. On Thursday, St. Louis Fed President Alberto Musalem commented that the central bank will need to lift rates again to return inflation to its 2% objective, while declining to specify his preferred outcome for the meeting later this month.
Fed Governor Christopher Waller also indicated that additional hikes will likely be required to bring inflation back to the 2% target. However, he emphasized that there was “flexibility” in the timing of those moves and kept open the possibility of skipping a hike at the October gathering.
US Yields Slip As Market Tones Down Near-Term Fed Expectations
Diminishing expectations of aggressive near-term tightening by the Fed weighed on US government bond yields. The benchmark 10-year Treasury yield fell more than 4 basis points to 5.227% after having reached its highest level since 2002 earlier in the week. The 30-year Treasury yield declined more than 5 basis points to 5.602% after recently trading near a 24-year high.
Futures pricing reflected a 17.7% probability of a rate increase in October and an 83% chance of an additional hike in December, according to the CME FedWatch tool.
| Instrument / Event | Latest Indication |
|---|---|
| NZD/USD | Around 0.5615 in early Asian trade |
| US 10-year Treasury yield | 5.227% (down more than 4 bps) |
| US 30-year Treasury yield | 5.602% (down more than 5 bps) |
| Market-implied chance of October Fed hike | 17.7% |
| Market-implied chance of December Fed hike | 83% |
RBNZ Outlook: Westpac Sees December Hike After October Hold
On the New Zealand side, Westpac economists continue to project that the Reserve Bank of New Zealand will keep the Official Cash Rate unchanged at 2.75% this month. They anticipate a 25 basis point increase in December, followed by two additional hikes in early 2027.
Scotiabank: Dollar Strengths Tied To Oil and Yield Moves
Despite the softer tone described earlier, commentary from Scotiabank strategists noted broader resilience in the US Dollar. They observed that the “USD continues to show broad strength and is entering Thursday’s NA session with gains against all of the G10 currencies,” even as underlying rate expectations have remained relatively restrained.
According to their assessment, geopolitical developments were feeding into core financial markets, with “the impact on oil prices and global bond yields… clear, with WTI up $4/bbl on the day and trading back above $90/bbl as the US 10Y threatens fresh multi-decade highs above 5.35% nearing levels last seen in 2002.” They highlighted that, in contrast, “Fed pricing remains muted with only 5bpts of tightening priced for October and a cumulative 26bpts by December, showing little reaction to the latest turn in oil prices.”
Waller’s Hawkish Tone Supports Dollar Sentiment
Fed Governor Waller’s latest remarks carried a distinctly hawkish tilt. His message was assigned an FXS Speechtracker score of 8/10, surpassing the established baseline of 7.2/10 and indicating a stronger-than-usual bias toward tightening. The communication stressed that “more hikes [are] needed” but suggested they do not have to occur at consecutive meetings, pointing to a preference for a higher eventual policy peak with tactical flexibility.
The speech underscored AI-linked investment, ongoing energy shocks, a strengthening economy, and a still “solid and stable” labor market as key contributors to sustained inflation pressures. His concern that inflation has been running above target for nearly 5-1/2 years and might destabilize expectations reinforced the inclination toward further tightening, a configuration that is typically supportive for the US Dollar.
The FXS Fed Sentiment Index increased by 0.42 points to 138.34, firmly within hawkish territory and aligned with the elevated FXS Speechtracker reading. This uptick signaled that market-implied views on Fed policy have swung further toward additional tightening, bolstering a hawkish narrative that could remain a constructive medium-term factor for the Dollar.
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