NZD/USD extended its recovery for a third consecutive session, rising from its October 14 low of 0.5565 to close at 0.5663, its highest since September 28. The market is pricing an 80.7% probability of a third consecutive 25 bps hike at the October 28 Reserve Bank of New Zealand meeting, which would lift the Official Cash Rate to 3%, the upper bound of the 1.3% inflation target range. However, the NZD’s rebound was as much about a weaker USD, driven by Fed officials downplaying prospects of another hike at the October 28 FOMC meeting.
The NZD’s recovery may lose momentum after next week’s RBNZ and FOMC meetings. The RBNZ will likely signal a pause, and Fed officials have kept the door open for a hike in December. New Zealand’s October 22 CPI release is expected to show inflation slowing to 0.8% QoQ (3.8% YoY) in 2Q26 from 1.5% QoQ (4.1% YoY) in the previous quarter. RBNZ Chief Economist Paul Conway has also become less concerned about second-round effects from elevated energy prices. Following rate hikes in July and September, Conway described monetary policy setting as borderline between stimulatory and more neutral levels.
With the OCR approaching the mid-point of its estimated 2.5-3.5% neutral range, further NZD recovery within the past year’s 0.56-0.61 range may depend on fresh catalysts for USD weakness. Fed officials could increasingly distinguish between energy-driven inflation and underlying inflation, tempering market expectations of 2027 rate hikes. The US exceptionalism narrative faces challenges from a potential Democratic sweep in the November 3 US midterm elections and from concerns that debt-funded AI investment is undermining US equity valuations and growth prospects.
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