MUFG said the Reserve Bank of New Zealand is expected to keep rates unchanged while issuing a hawkish message, alongside updated forecasts pointing to higher inflation and a higher projected Official Cash Rate for this year and next. The bank said the RBNZ has recently reacted aggressively to inflation risks, and that guidance implying two to three rate hikes this year would be consistent with current market expectations.
Market pricing was described as having around 70bps of tightening factored in, which MUFG said could reinforce NZD momentum if the US Dollar softens on the back of a US–Iran peace deal. It also reported that NZD Leveraged Funds’ short position was reduced in the week to last Tuesday, after previously reaching its largest level since December 2019. The article was produced with the assistance of an AI tool and reviewed by an editor.
Hawkish RBNZ Outlook and Policy Implications
We expect the Reserve Bank of New Zealand to hold the Official Cash Rate steady at its meeting tomorrow, May 27th, but to deliver a distinctly hawkish message. Recent data showed inflation remains sticky, with the latest quarterly CPI print coming in at 3.8%, well above the RBNZ’s target band. This will likely force the bank to project a higher rate path for the rest of 2026.
This outlook points us toward derivatives that would benefit from a rising New Zealand dollar, such as buying NZD call options or NZD/USD futures. The swaps market is currently pricing in approximately 75 basis points of tightening by the end of the year, so a signal for two or three hikes would validate this view. We see this as a plausible scenario that should support the NZD in the coming weeks.
Drivers of NZD Upside: Dollar Dynamics and Positioning
Further momentum could come from a weakening US dollar, especially if progress is made in US-Iran diplomatic talks. The US Dollar Index (DXY) has stalled near multi-month highs around 106.50, suggesting it may be vulnerable to a pullback on positive geopolitical news. This creates a favorable backdrop for NZD/USD to move higher.
We are also watching speculative positioning closely, as leveraged funds are still holding significant short positions against the kiwi dollar. The latest Commitment of Traders report showed these shorts have begun to shrink from their largest level since late 2023. Any further NZD strength could force these traders to cover their positions, adding fuel to the currency’s upward move.
