New Zealand’s inflation expectations have remained stable over a two-year period, holding at 2.28% for Q4 2025, based on the latest survey from the Reserve Bank of New Zealand. In contrast, the average one-year inflation expectations saw a slight increase from 2.37% to 2.39%. At the same time, the NZD/USD exchange rate was at 0.5636, reflecting a 0.16% drop for the day. Over the past week, the New Zealand Dollar weakened against major currencies, notably declining 1.62% against the Swiss Franc.

Reserve Bank Expectation Survey

The Reserve Bank of New Zealand carries out quarterly surveys to understand business leaders’ inflation predictions for the next two years. While these predictions can briefly vary, they usually align with actual inflation over time. Recently, expectations have been around 2.8% for Q3. Inflation expectations can influence the NZD/USD exchange rate. Higher expectations may suggest fewer interest rate cuts or increases. Shifts in these expectations can also affect the Reserve Bank’s monetary policy decisions, which focus on maintaining stable prices and employment. In extreme situations, the Reserve Bank might use tools like Quantitative Easing to stimulate economic activity, especially when lowering interest rates alone isn’t enough, as seen during the Covid-19 pandemic. The stable two-year inflation expectation at 2.28% sits within the Reserve Bank’s target band but is above the ideal 2% midpoint. This stability indicates that while the Reserve Bank is not likely to raise interest rates aggressively, there is also no immediate pressure to cut rates. For now, the central bank is expected to maintain its current stance. With the Official Cash Rate at 5.50%, this information supports the view that interest rates will remain elevated for an extended period. After New Zealand’s economy entered a technical recession in late 2023, the current slow growth environment makes further rate hikes risky for the Reserve Bank. The combination of persistent inflation and a fragile economy is likely to keep the New Zealand dollar weak.

Opportunities in the Currency Market

Given this outlook, implied volatility on NZD options may decrease as the central bank’s actions seem predictable. Traders might consider strategies that benefit from a continued decline or stable NZD/USD, such as buying puts or selling call spreads. With no clear signs of a robust recovery for the Kiwi dollar, bullish positions appear less attractive in the upcoming weeks. In the interest rate market, it’s likely that swaps will continue to dismiss the possibility of a near-term rate cut. Current data indicates that policy will stay tight well into 2026, making it hard for the New Zealand dollar to gain strength against currencies with more favorable economic outlooks. The Kiwi dollar has been the weakest major currency this past week, showing notable underperformance against the Swiss Franc and others. This weakness isn’t solely due to the strength of the US dollar; it highlights genuine NZD fragility. This trend opens up opportunities in currency trading, where traders might look to short the NZD against currencies that have more aggressive central banks or stronger economic prospects. Create your live VT Markets account and start trading now.

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