New Zealand Dollar: Dovish RBNZ hike weighs – BBH

Brown Brothers Harriman’s (BBH) Elias Haddad reports the New Zealand Dollar (NZD) underperformed after the Reserve Bank of New Zealand (RBNZ) delivered a 25 bps hike to 2.75% but signaled reduced need for further tightening. Haddad notes the RBNZ’s virtually unchanged OCR path peaking near 3.25% contrasts with market pricing near 4.00%, leaving room for dovish repricing that could continue to pressure NZD.

Policy path gap pressures NZD

"NZD underperformed across the board after the RBNZ delivered a dovish hike. As was widely expected, the RBNZ raised the Official Cash Rate (OCR) for a second straight time by 25bps to 2.75%."

"However, the RBNZ cautioned that “this decision reduces the risk that the OCR needs to increase by more later.”"

"Indeed, the RBNZ stressed that “spare capacity remains in the economy, particularly in the labour market.” The RBNZ also left its OCR path virtually unchanged from May, still projecting a peak of around 3.25% in 2028."

"In contrast, the swaps curve implies the OCR at 4.00% in the next two years. This gap leaves ample room for a dovish repricing which is a drag on NZD."