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Singapore-based OCBC says expectations for New Zealand dollar outperformance need a "reality check".
In their latest FX forecast update, OCBC says the market expects too much from the Reserve Bank of New Zealand (RBNZ) and that it won't raise interest rates to levels currently expected by the market.
"Market pricing has swung sharply hawkish, with close to three rate hikes now priced by year‑end," says OCBC.
To be sure, interest rate expectations have shifted higher across the globe over the course of March as investors factor in the realities of higher energy prices caused by the Iran war.
However, domestically, RBNZ Governor Anna Breman has encouraged a shift higher in NZ rate expectations, saying on April 09 that "if we do see that medium-term inflation starts picking up, then we will act decisively and that means rate hikes."
"The NZD firmed after hawkish remarks from RBNZ Governor Breman, who signalled the Bank would not hesitate to hike rates aggressively if core inflation were to re‑accelerate," says the bank.
The RBNZ left the OCR unchanged at 2.25% at April's policy meeting, but the market's overall takeaway was that the central bank stood ready to raise rates on any evidence of rising domestic inflation dynamics.
That helped arrest a decline in the NZD, confirming the currency to be sensitive to rate expectations. That's why OCBC thinks the NZD faces a "reality check" when Kiwi rate bets moderate.
"Market pricing has swung sharply hawkish, with close to three rate hikes now priced by year‑end," says OCBC. "This looks stretched."
The RBNZ will struggle to justify raising interest rates, explains OCBC, because of New Zealand’s sizeable negative output gap and recent run of below‑trend growth, "which together set a high bar for aggressive tightening."
Analysts expect the RBNZ to begin hiking only in 4Q26, delivering a single 25bp move that lifts the policy rate to 2.75% by end‑2026.
"Relative NZD underperformance versus the AUD should persist," says OCBC.