Kiwi looks to RBNZ rate decision to build on bullish momentum
NEW Zealand’s dollar is poised to extend recent gains and rally towards its March high as concern over elevated inflation damps expectations for interest-rate cuts this year.
The kiwi climbed to the strongest level in two months last week, breaking out of the downtrend it’s been in since the start of 2024. The currency may get another boost on Wednesday (May 22) if the Reserve Bank of New Zealand (RBNZ) pushes back against market forecasts for policy easing by year-end.
Swaps traders are pricing in 47 basis points of RBNZ rate cuts this year, aided by weaker-than-expected first-quarter employment data, declining business confidence and falling inflation expectations. For Westpac Banking and ANZ Bank New Zealand, any monetary easing before 2025 is unlikely, while Bank of New Zealand does not see a rate cut before the November meeting.
“It will only be after the second- and third-quarter inflation data that the central bank may be comfortable enough to signal easing is likely,” said Imre Speizer, Auckland-based market strategist at Westpac. The market is expecting the Federal Reserve to start cutting rates in September, which will also be positive for the kiwi, he said.
Both Westpac and Bank of New Zealand see the kiwi potentially strengthening to 62 US cents by the end of June. The currency advanced 1.9 per cent last week to 61.33 US cents, its biggest weekly gain since December.
The RBNZ, which is forecast to keep its benchmark rate on hold this week, indicated at its previous meeting in April that it might not pivot to easing until 2025 due to stubborn price pressures. While first-quarter headline inflation slowed in line with estimates, the non-tradable element rose more than economists forecast, signalling domestic inflationary pressures still linger.
Investors will now be looking to see if RBNZ changes its commentary after parsing the data released since its previous policy meeting. If the central bank does not give any dovish signals, that may put pressure on swap markets to pare rate-cut expectations, boosting the kiwi.
“The New Zealand dollar remains very cheap on our short-term fair value model,” said Jason Wong, Wellington-based currency strategist at the Bank of New Zealand. “Risks are more skewed to the upside than downside from here, with US inflation metrics and monetary policy outlook remaining a key driver of currency markets.” BLOOMBERG
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