New Zealand dollar extends losses to two-month low on interest rate differential concerns

The New Zealand dollar fell against a basket of global currencies in Asian trading on Wednesday, extending its losses against the US dollar for a third consecutive day and hitting a two-month low amid growing concerns over a widening interest rate differential between New Zealand and the United States.

The Federal Reserve is preparing to announce its first US interest rate hike since July 2023 later today, in an effort to contain mounting inflationary pressures in the United States linked to the sharp rise in fuel prices.

Following the less hawkish Reserve Bank of New Zealand meeting earlier this month, expectations for a New Zealand interest rate hike in October have declined, particularly amid weak economic growth and a struggling labor market.

The Price

• The New Zealand dollar fell 0.4% against the US dollar to $0.5736, its lowest level since July 9, from an opening price of $0.5758, while recording a high of $0.5765.

• The New Zealand dollar ended Tuesday’s trading down 0.35% against the US dollar, marking its second consecutive daily loss, pressured by another surge in long-term US Treasury yields.

US dollar

The US Dollar Index rose around 0.15% on Wednesday, extending its gains for a third consecutive session and trading near a two-week high, reflecting continued strength in the US currency against a basket of major and minor currencies.

The yield on the 10-year US Treasury note is trading near its highest level in 19 years, providing further support for the US dollar as the more attractive investment.

The Federal Reserve concludes its regular policy meeting today to assess developments in the US economy and determine the appropriate course for monetary policy, with expectations widely favoring a 25-basis-point increase in US interest rates to 4.0%, which would be the first hike since July 2023.

New Zealand interest rates

• Market pricing for the probability of a 25-basis-point increase in New Zealand interest rates at the upcoming October meeting currently remains below 50%.

• Investors will be watching a series of key economic releases from New Zealand in the coming period, including inflation, unemployment and economic growth data, for a reassessment of those expectations.

Interest rate differential

If the Federal Reserve raises US interest rates by 25 basis points to 4.0%, the interest rate differential between the United States and New Zealand will widen to 125 basis points, increasing the relative attractiveness of the US dollar against the New Zealand dollar.

New Zealand dollar outlook

We expect that the New Zealand dollar will remain in negative territory against its US counterpart and could fall to fresh multi-month lows, particularly if the outcome of the Federal Reserve meeting is more hawkish than markets currently expect.