Rabobank’s FX Strategy team analyzed the outlook for the New Zealand Dollar (NZD) ahead of the Reserve Bank of New Zealand (RBNZ) meeting scheduled for July 8, where both Rabobank and the consensus from a Bloomberg survey anticipate a 25 basis point rate hike, bringing the main policy rate to 2.5% [1]. However, forecasters are not unanimous in this expectation, reflecting some uncertainty in the market [1].
The team noted that the NZD is currently underperforming, ranking second to last on the G10 one-day performance table, just above the Japanese Yen (JPY) [1]. This weakness is attributed to market doubts about the RBNZ's resolve to continue tightening policy, especially as inflation pressures have moderated due to a substantial decline in oil prices following the June 17 Memorandum of Understanding (MoU) signed by the US and Iran [1].
RBNZ Governor Breman stated after the May policy meeting that the central bank expects to "increase interest rates this year, to help keep a lid on inflation" [1]. Market-implied interest rates suggest nearly four 25 basis point hikes from the RBNZ over the next year, potentially reaching around 3.18% from the current 2.25% [1]. This aligns with the NZ shadow Board's forecasts, which center around rates reaching 3-3.25% over the next year [1].
Rabobank believes that with so much tightening already priced in, there is limited scope for the NZD to improve its position among G10 currencies this year. The team warns that any indication of the RBNZ softening its hawkish stance could leave the NZD vulnerable to further weakness [1].
CONCLUSION
Rabobank expects the RBNZ to deliver a 25 basis point rate hike at its upcoming meeting, but sees limited upside for the New Zealand Dollar due to already priced-in tightening and market doubts about the central bank's resolve. The NZD remains vulnerable if the RBNZ signals a less hawkish stance.