NZD Nears 0.5700 as Markets Price Further RBNZ Hikes

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NZD/USD Rises Ahead of RBNZ and Fed Policy Decisions

The NZD/USD pair is edging higher toward the 0.5700 area in Monday’s early Asian session, supported by growing expectations of further tightening by the Reserve Bank of New Zealand (RBNZ). The New Zealand Dollar is firming against the US Dollar as traders look ahead to interest rate decisions from both the RBNZ and the US Federal Reserve scheduled for Wednesday.

Many analysts anticipate that New Zealand inflation will accelerate to well above 4% in the fourth quarter and may remain outside the RBNZ’s 1-3% target band for a longer period than previously projected. Against this inflation backdrop, New Zealand’s central bank is widely expected to lift the Official Cash Rate by another 25 basis points to 3.00% at its upcoming policy meeting.

“Higher for longer inflation is a major headache for the RBNZ,” said Mark Smith, senior economist at ASB Bank in Auckland, who sees inflation above 3% until the fourth quarter next year and tips a rate hike on October 28. “We expect the RBNZ to acknowledge that they have more work to do and to maintain a conditional tightening bias,” Mark added.

Fed Outlook: Cautious Tone Softens Odds of Near-Term Hikes

On the US side, the Federal Reserve raised its benchmark rate in September for the first time in about three years. However, expectations for additional increases have moderated after Fed Chair Kevin Warsh emphasized a cautious approach in recent comments. Warsh said at the International Monetary Fund’s (IMF) annual meeting that he would not prejudge future rate decisions.

Reinforcing that stance, Fed Vice Chair Philip Jefferson and Governor Christopher Waller indicated there was no urgency to proceed with further tightening. Data from the CME FedWatch tool show that the implied probability of an October rate hike has dropped from as high as 70% to around 9.4%.

Persistent Inflation Supports RBNZ Tightening Path

Strategists at Brown Brothers Harriman (BBH) argue that underlying inflation pressures in New Zealand remain resilient despite a softer headline consumer price index print. They note that the RBNZ’s sectoral factor model “printed at 2.8% y/y for a second straight quarter, near the top of its 1-3% target range,” while “CPI ex. petrol remained at 3.2% y/y for a fourth consecutive quarter,” pointing to sticky core inflation.

In this context, BBH believes that “above target inflation and still elevated oil prices argue for additional RBNZ rate hikes.” According to their assessment, “the swaps curve price in 85% odds of a 25bps RBNZ rate hike to 3.00% on October 28 and more than 100bps of tightening over the next twelve months to 3.75% – near the upper end of the RBNZ’s estimated neutral range of 2.20%-4.10%.”

However, BBH highlights that ongoing US tightening expectations remain a counterweight for the kiwi. They caution that “nonetheless, NZD/USD upside is constrained because Fed tightening curbs the scope for policy convergence,” limiting the pair’s ability to fully benefit from a hawkish RBNZ outlook.

Warsh Emphasizes Data Dependence and Investment Themes

Fed Chair Warsh’s latest remarks scored 5.6/10 on the FXS Speechtracker, slightly below the historical average of 6.1/10, signaling a cautious message despite constructive comments on structural growth and investment. The reference to being “over-scarred from the global financial crisis” underscores a continued focus on risk management and financial stability, even as Warsh highlighted artificial intelligence and private-sector investment as important supports for real economic activity.

Warsh avoided committing to specific policy outcomes for the October and December meetings, instead stressing the need for more clarity from data on output, labor markets, and inflation. This reinforces a data-dependent approach that keeps US Dollar rate expectations flexible while still anchored in the Fed’s stated objective of price stability.

The FXS Fed Sentiment Index was unchanged, moving 0.00 points to a still-hawkish reading of 127.51. This suggests that the speech left overall perceptions of the Fed’s policy stance intact. The combination of a high index level and a slightly below-baseline speech score indicates that, relative to the established benchmark, Warsh’s comments preserve a hawkish environment for the Dollar without introducing new signals for additional tightening.

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