Commerzbank’s Norman Liebke notes that the Reserve Bank of New Zealand (RBNZ) surprised markets by holding at 2.75%, even as it signalled further hikes will likely be needed. He sees limited medium-term upside for New Zealand Dollar (NZD), arguing market pricing of around four hikes by next September is too hawkish and expecting the Kiwi to weaken as expectations are pared back.

Hawkish pricing seen as excessive

“The Reserve Bank of New Zealand left its policy rate unchanged at 2.75%, contrary to market expectations, an outcome that my colleague Volkmar had cautiously anticipated in his latest strategic currency briefing. The decision was as close as it can get, with a 4-3 vote.”

“Nevertheless, inflationary pressures remain high. After the inflation rate edged down from 4.1% to 3.7% in the third quarter, the RBNZ expects it to rise again to 4.4% in the fourth quarter. Higher fuel prices and the weaker NZD are adding to price pressures. Accordingly, despite pausing at this meeting, the RBNZ made it clear that further rate hikes are likely to be necessary from today’s perspective.”

“The Kiwi temporarily fell by 1.6% against the USD to almost 0.56. Over the medium term, however, we do not see much upside for the NZD either, given what we consider overly hawkish market expectations. Although there was no rate hike at this meeting, the market is pricing in around four 25-basis-point hikes by September next year and appears to have interpreted the RBNZ’s communication as signalling a postponement of rate hikes rather than fewer hikes overall.”

“While we continue to expect a rate hike in December, we are more sceptical than the market about the medium-term outlook. As rate-hike expectations are pared back, the Kiwi is therefore likely to weaken. At the same time, we also consider current expectations for the Fed to be too hawkish, which should limit the extent of any NZD depreciation.”