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New Zealand currency: Kiwi dollar (NZD) weak ahead of central bank meet

12:22, 24 May 2022

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RBNZ Governor Adrian Orr speaking at a press conference
New Zealand is well into its rate hike cycle and markets have already priced in a 50 basis points hike in the official cash rate – Photo: Getty Images

The New Zealand dollar, commonly known as the Kiwi dollar, was down versus the US dollar (NZD/USD), ahead of the Reserve Bank of New Zealand’s (RBNZ) monetary policy committee meeting on Wednesday (25 May). 

On Tuesday (24 May), the NZD/USD exchange rate was 0.41% lower at 0.6431, despite the central bank being widely expected to raise the official cash rate by 50 basis points. New Zealand is well into its rate hike cycle and the central bank started raising rates in October last year. 

New Zealand dollar-US dollar (NZD/USD) exchange rate

Rate hike not a surprise

The expected 50 basis points rate hike is fully priced in by the markets and as a result, the currency was largely unaffected by the central bank’s meeting. 

“Markets have fully priced a 50bp hike, a Q4 2022 average of 3.1%, with the peak reached in Q3 2023 at an average of 3.8% (we express market pricing here as a quarterly average, matching the definition in the OCR track),” Imre Speizer, head of New Zealand strategy at Westpac, said in a note.

According to Speizer, the Kiwi dollar will gain only if the RBNZ is hawkish and raises rates by more than 50 basis points. 

 

NZD rally on the cards

In a separate note, Speizer said that after hitting a two-year low earlier in May, the NZD is set to embark on a rally against the USD and the NZD/USD rate could cross 0.69 by the year end. 

“For the week ahead, we target 0.6530 - a technical target…The main driver of the recent NZD/USD rally has been some weakening of the US dollar, in turn caused by a slowdown in Fed rate hike pricing. It’s too early to conclude Fed pricing will not rise again, given officials emphasise front loading of the cycle, so that a final burst of USD strength is possible over the next month or two. But beyond that, we expect USD strength to fade,” he said. 

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“In addition, New Zealand commodity prices should reassert themselves as China starts to recover from Covid lockdowns. We expect NZD/USD to exceed 0.6900 by year end,” he added. 

ANZ Research also said that the Kiwi dollar could see more gains, especially if the RBNZ is hawkish.

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