Following a modest decline in the prior session, the NZD/USD pair has once again fallen into choppy trading. During Thursday's (October 8) Asian session, the currency pair held in positive territory, trading near 0.5600.

However, the market broadly believes this pair still faces further downside pressure, with the core driver coming from a strengthening US dollar. US Treasury yields have continued to rebound, approaching multi-decade highs not seen since 2002, providing strong support for the dollar and capping the upside for the New Zealand dollar. Market attention is focused on public remarks from Federal Reserve officials and upcoming rate decisions, while rising oil prices have fueled inflation concerns, rekindling expectations for Fed rate hikes. The Reserve Bank of New Zealand's rate path has also become another key variable influencing NZD movements.

US Treasury yields surge, Fed officials' speeches to signal direction

The US 10-year Treasury yield is trading near 5.31%, while the 30-year Treasury yield has reached 5.70%. The continued climb in long-end US Treasury yields directly boosts the appeal of dollar-denominated assets, putting broad pressure on non-dollar currencies.

Traders are closely awaiting public remarks from Federal Reserve officials. Christopher Waller and Alberto Musalem are set to speak, and the market hopes to glean directional clues about the Fed's upcoming monetary policy from their statements.

International oil prices have risen sharply recently, reigniting market concerns about sticky inflation. The market believes the likelihood of the Fed maintaining high rates or even continuing to hike has increased. Minutes from the Fed's previous policy meeting showed that policymakers unanimously supported the September rate hike, with the vast majority of officials agreeing that another hike would be necessary before the end of 2026.

The market widely expects the Fed to keep rates unchanged at its October meeting, but data from the CME FedWatch Tool shows traders are still pricing in a 78.3% probability of a December rate hike.

Dollar reverses divergence, strengthening broadly across G10 currencies

Strategists at Scotiabank noted that the dollar has reclaimed its dominant position among major currencies. The strategists said that after a period of divergence among G10 currencies, the dollar has once again demonstrated broad-based strength after nearly a week. This broad dollar rally stands in sharp contrast to the mixed and divergent market movements of the previous few trading days, marking a clear shift in the dollar's near-term tone.

Previously, G10 developed-market currencies moved in different directions, with some currencies carving out independent paths based on their own fundamentals, while the dollar index traded relatively choppily. But as US Treasury yields rose and Fed rate hike expectations revived, the dollar gained broad buying support and began pressuring non-dollar currencies including the NZD, bringing the main thread of the forex market back to dollar strength.

RBNZ rate hike expectations fully priced in, October decision looms over NZD outlook

The Reserve Bank of New Zealand has already raised its benchmark rate by 25 basis points, and financial markets have begun pricing in further monetary tightening by the RBNZ. Money markets have fully digested expectations for another hike in December, and investors are closely watching the RBNZ's next policy decision scheduled for October 28.

RBNZ monetary policy is the core domestic variable determining the NZD's trajectory. If the RBNZ delivers a hawkish stance and maintains its rate hike path, it could partially offset the negative impact of dollar strength and support the NZD. But if the RBNZ signals a dovish tilt, suggesting the current hiking cycle has likely ended, then under the broader environment of dollar strength, downside pressure on NZD/USD would be further amplified.

The NZD/USD pair's current brief stabilization at the 0.5600 level is essentially the result of a tug-of-war between bulls and bears. Going forward, differences in monetary policy expectations between the two countries will dominate the pair's medium-term direction.

Conclusion

In summary, NZD/USD is maintaining a choppy range in the short term, but fundamental headwinds are predominant. Long-end US Treasury yields are near multi-year highs, and combined with inflation concerns boosting the probability of a December Fed rate hike, the dollar has strengthened broadly across G10 currencies, placing significant downside pressure on the NZD.

The market is on one hand awaiting Fed officials' speeches to capture policy signals, and on the other hand closely watching the outcome of the RBNZ's October policy meeting to gauge the extent of domestic monetary tightening. Fluctuations in the dollar and US Treasury yields, along with the tug-of-war over central bank policy expectations between the two countries, will continue to dominate NZD/USD price action. Short-term volatility risk in the forex market should not be overlooked.

NZD/USD daily chart Source: Yihuitong. As of 13:43 Beijing time on October 8, NZD/USD was quoted at 0.5600/01.