New Zealand Dollar tests two-month lows below 0.5765 amid Fed hiking bets

The New Zealand Dollar (NZD) has been declining against the US Dollar (USD) over the past two weeks, reaching as low as 0.5765 after dropping more than 2.5% in September. The primary reasons for this downward trend include concerns related to the Middle East conflict, unrest in the global bond market, and increased expectations of US Federal Reserve (Fed) interest rate hikes.

The focus on Tuesday is on the US Retail Sales release for August, which is expected to have limited impact on USD volatility, as it will not alter the prevailing view that the Fed will raise interest rates by 0.25% on Wednesday and possibly another 0.25% in December. Earlier positive Nonfarm Payrolls (NFP) data and inflationary figures have led futures markets to estimate a 92% probability of a monetary tightening move by the Fed this week, up from 60% last week.

Additionally, China's economic performance has further contributed to the declining NZD, with Industrial Production growing by 5.2% in August, up from 4.5% in July, but Retail Sales slowing to 0.4% in September, down from 0.6% in July, indicating weak domestic demand. Strategists at Brown Brothers Harriman predict that the Reserve Bank of New Zealand will raise its policy rate to around 3.25% by 2028, still below its estimated neutral range of 2.3% to 4.1%.

This discrepancy in expectations between the central bank's tightening path and market assumptions may lead to a negative impact on the NZD.