Kiwi slid 1.6% after surprise RBNZ pause: Why might December hike bets fail to support it?

The US Dollar (USD) gained ground after the Reserve Bank of New Zealand (RBNZ) unexpectedly kept monetary policy on hold, retaining its Official Cash Rate (OCR) at 2.75%. The narrow 4–3 vote defied widespread market expectations of a 25-basis-point (bps) rate hike. Following the decision, the New Zealand Dollar lost as much as 1.6% against the Greenback, pulling NZD/USD towards the lower edge of its key multi-month support zone at 0.5560/0.5550. Although the RBNZ indicated that rising fourth-quarter inflation may require further tightening, markets are weighing two possibilities: whether US Dollar strength will trigger a deeper technical breakdown in NZD/USD, or whether overstretched Fed interest rate expectations will restrict additional USD gains.

Could NZD/USD fall towards 0.5480 below 0.5560? Societe Generale flags breakdown risk

The pressure on the New Zealand Dollar following the RBNZ's decision to hold the OCR at 2.75% is severe, according to analysts at Societe Generale. NZD/USD has consequently moved straight to the lower edge of its multi-month trading range. Unless buyers protect the crucial 0.5560/0.5550 support zone, the risk of a prolonged downtrend towards multi-year lows will rise.

"NZD/USD is challenging the lower boundary of its multi-month range at 0.5560/0.5550, a crucial support zone... A short-term rebound cannot be ruled out; however, the recent pivot high at 0.5710 could act as resistance... If the pair fails to defend the support at 0.5560/0.5550, the risk of a deeper downtrend would increase... In such a scenario, the next objectives could be located at the April 2025 low near 0.5480 and projections at 0.5420."

Can Fed repricing limit USD gains as Commerzbank expects a weaker NZD?

A December rate hike remains likely because of elevated headline inflation, argues Norman Liebke at Commerzbank, despite the RBNZ's surprise 4–3 vote to keep rates at 2.75%. Money markets, however, are factoring in roughly four rate increases by next September. As those expectations are pared back, Liebke anticipates little medium-term upside for the Kiwi. At the same time, he expects excessive hawkishness in Fed pricing to keep a US Dollar rally in check.

"The Reserve Bank of New Zealand left its policy rate unchanged at 2.75%, contrary to market expectations... 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... 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."

What is the key market implication?

The US Dollar's relative strength has been bolstered by the RBNZ's surprise decision to leave rates unchanged, bringing NZD/USD to a test of the crucial support zone at 0.5560/0.5550. A break below this area could clear a technical route towards further losses, cautions Societe Generale, with a downside level of 0.5480. Meanwhile, Commerzbank expects reduced expectations for RBNZ rate hikes to put pressure on the Kiwi. Its assessment of the Fed, however, is that excessively hawkish market pricing will ultimately limit the US Dollar's scope for significantly larger gains.

(This article was created with the help of an Artificial Intelligence tool and reviewed by an editor. Know more.)