New Zealand Dollar Strength Looking Overdone Ahead of RBNZ: Saxo Bank

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The New Zealand Dollar is the best-performing major currency of the past month but one analyst says it is looking "stretched" ahead of the impending Reserve Bank of New Zealand interest rate decision.

The Kiwi has advanced against all its G10 peers over the past four weeks aided by a notable uptick in global investor sentiment and as investors raised their expectations for the amount of hiking to come from the RBNZ following a string of above-consensus domestic data releases.

But these expectations will be tested at 01:00 GMT on Wednesday as markets are evenly split on whether the central bank will go with a 50 basis point or 75bp move, offering up a potentially market-moving decision.

"A remarkable run for NZDUSD of late faces an interesting test here with somewhat downbeat risk sentiment and the market’s indecision on whether the RBNZ will hike by 50 basis points once again or will accelerate to a 75-basis point pace after hot inflation data for Q3," says John Hardy, Head of FX Strategy at Saxo Bank.

Ahead of the decision the NZD/USD exchange rate is quoted at 0.6134 and the Pound to New Zealand Dollar exchange rate at 1.9310. (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)

The market raised expectations for a 75bp hike following New Zealand's October Q3 CPI inflation release, which came ahead of expectations.

Labour market and quarterly wage data also supported these expectations.

But Hardy says he is not sure the RBNZ will want to accelerate its hikes when it was one of the first to move and has been consistent with the 50 basis point moves, with no need to play catch-up as it is among the rate leaders in the G10.

If Hardy is correct, the decision to go 50bp could disappoint against more hawkish expectations and pose downside for the NZ Dollar, although it is noted too that the guidance regarding the coming months could be equally, or more, important.

"We have seen a strong dose of kiwi strength since that CPI release last month, as the NZD is some 5% higher against the AUD from the peak in late September and 10% stronger versus the US dollar," says Hardy.

"Shortly put – certainly possible that the RBNZ goes 75 but I would find it surprising. As a side note, if risk sentiment returns, the kiwi may get very little from a larger move," he adds.

The RBNZ raised interest rates by 50bp in October to 3.5% but said it had considered a 75bp hike, noting that raising by such an amount now would reduce the need for a higher peak in the OCR.

Arguments for a 50bp hike included the need to let the impact of past decisions be felt, given there is a lag in transmission.

"In short, I am getting a bit contrarian on NZD strength after a run of the kiwi proving the strongest among G10 currencies for the last couple of weeks, I question the need for the RBNZ to accelerate this far into the cycle," says Hardy.