New Zealand dollar extends rally as markets price in hikes

SYDNEY: The New Zealand dollar added to gains on Thursday as renewed hostilities in the Gulf spiked oil prices and ramped up wagers on further hikes in local rates, slugging bond markets.

Investors are now pricing in a 74% chance the Reserve Bank of New Zealand tightens rates again in September, following Wednesday’s increase to 2.50%.

Markets also imply a 60% chance the Reserve Bank of Australia will hike for a fourth time this year, up from 40% early in the week.

The kiwi dollar firmed another 0.3% to $0.5718, after rising 0.4% overnight.

Support comes in at $0.5672 and $0.5627, with resistance at $0.5726.

The Aussie slipped to the three-week low on the kiwi at NZ$1.2104.

The Aussie lagged at $0.6930, having edged up from a low of $0.6907 overnight.

Resistance lies at $0.6959 and $0.7088, with support at the recent trough of $0.6686.

Analysts see a good chance the RBNZ will lift the official cash rate (OCR) again in September, but are more divided on how high rates might eventually get.

Goldman Sachs and Citi see rates peaking at 2.75% given the economy still has considerable spare capacity. Kiwibank thinks the RBNZ will stop at neutral, which it assesses as 3.0%, while ASB and Capital Economics tip a top of 3.25%.

Westpac and BNZ see rates going into even tighter territory and as high as 4.0%. For their part, markets are pricing a peak at 3.25% or 3.5%.

“The RBNZ seems to be comfortable with an end-2026 level in the 2.75%-3% range,” said Kelly Eckhold, chief NZ economist at Westpac.

“We continue to forecast a peak OCR of 4.0% next year, although it goes without saying that the evolution of monetary policy will depend on how both global events and key data evolve.”

The hawkish outlook was supported by a survey out on Thursday showing manufacturing activity rebounded in June to its strongest since mid-2021. This week’s hike combined with the jump in oil to push two-year swap rates up a steep 12 basis points to 3.4850%.

Ten-year bond yields climbed to 4.625%, up from a low of 4.355% in June.

Australian 10-year bond yields were up at 4.911%, having risen 11 basis points so far this week.