New Zealand Dollar rises as RBNZ rate hike expectations strengthen

• The New Zealand Dollar gains as markets expect further monetary tightening in New Zealand.
• The recent decline in US Treasury yields limits support for the US Dollar.
• Tensions between the US and Iran in the Strait of Hormuz continue to underpin safe-haven demand.

NZD/USD advances for the second consecutive day on Thursday, trading around 0.5940 at the time of writing, up 0.12% on the day. The New Zealand Dollar (NZD) benefits mainly from expectations of another interest rate hike by the Reserve Bank of New Zealand (RBNZ), while the US Dollar (USD) remains pressured by the recent decline in US Treasury yields.

New Zealand's monetary policy outlook remains supportive of the Kiwi following the latest hotter-than-expected inflation data. Markets are now pricing in up to three additional RBNZ rate hikes through early 2027, reinforcing expectations of another monetary policy tightening at the September meeting.

The external environment also provides some support to the New Zealand Dollar. The People's Bank of China (PBoC) kept its Loan Prime Rates (LPR) unchanged for the 15th consecutive month on Thursday, with the one-year rate at 3% and the five-year rate at 3.5%. Stable monetary conditions in China are closely monitored by investors due to the strong trade ties between China and New Zealand.

On the US side, the US Dollar remains under pressure despite the rebound in the yields on Thursday and the more hawkish tone of the Federal Reserve (Fed) Minutes released on Wednesday. The recent decline in US Treasury yields reduces the relative appeal of the Greenback and contributes to the advance in NZD/USD.

Treasury yields fell sharply on Wednesday following an announcement from the US Treasury regarding its long-dated debt buyback operations. Starting September 9, the Treasury plans to at least double the size of some buyback operations for securities maturing in 10 to 30 years, from $2 billion to at least $4 billion per operation. The decision helps ease the tensions that had recently pushed long-term yields higher. However, rates rebounded slightly on Thursday, as the market viewed these measures as failing to address the underlying economic problems in the United States.

US Treasury buybacks flatten curve as Dollar drifts lower

BBH’s Elias Haddad highlights that “US long-term Treasury yields have retraced most of yesterday’s drop triggered by the US Treasury’s buyback announcement, while USD has extended its decline.” He explains that “the Treasury buyback is essentially a debt-management swap. The Treasury buys and retires older, less liquid bonds (off-the-run) in favor of new, more liquid debt (on-the-run) issued through its regular auction. Total debt stays the same but its composition shifts toward newer, more liquid securities.”

According to BBH, “the additional buyback size will probably be financed at the margin through greater bill issuance. More front-end supply combined with long-bond purchases, point to a flatter yield curve. However, the impact should be limited given the small size of the operations relative to the overall Treasury market ($31.4 trillion).”

Haddad cautions that “the timing of the Treasury’s buyback announcement sends a less comfortable message. The Treasury expanded the long-end buybacks shortly after the 30-year Treasury yield reached its highest level since 2007. This suggests that heavy debt supply (public and private) is beginning to strain long-end liquidity and the Treasury is increasingly uncomfortable with rising borrowing costs.” In his view, “bottom line, the perception the Treasury is managing yields rather than liquidity undermines US fiscal credibility and is a drag on USD.”

US Treasury Secretary Scott Bessent said on Thursday that the buybacks could even exceed $4 billion and stressed that current yields do not, in his view, reflect the economy's underlying fundamentals. He also sees a strong chance that the US budget deficit has already peaked and signals an increased focus on fiscal consolidation.

The supportive backdrop for NZD/USD could nevertheless be limited by geopolitical tensions between the United States and Iran. Concerns remain particularly elevated around the Strait of Hormuz, a strategic route for global Oil trade. Persistent risk aversion could support demand for the US Dollar as a safe-haven currency and therefore limit further gains in the New Zealand Dollar.