Rate Gap to Drive NZD to Year-High Versus Euro, Strategists Say
The New Zealand dollar is poised to extend gains against the euro as investors price in a widening interest rate differential between the Reserve Bank of New Zealand and the European Central Bank.
The New Zealand dollar is set to strengthen to its highest level in over a year against the euro as a widening interest rate divergence drives investors toward higher-yielding assets. The EUR/NZD pair has already dropped 2.5% this month, closing last week at 1.96.
Strategists at Macquarie Bank, Westpac Banking Corp, and Canadian Imperial Bank of Commerce are uniformly bullish on the kiwi, with Macquarie predicting a 3.2% climb against the euro over the next three months. Overnight index swaps show the market expects the Reserve Bank of New Zealand to raise its benchmark rate by more than 100 basis points over the coming year. By contrast, the ECB is priced for roughly 75 basis points of additional tightening.
New Zealand's economic momentum is reinforcing the case for aggressive monetary policy. Both manufacturing PMI and the Performance of Services Index indicate accelerating domestic activity. Upcoming consumer confidence data this week will provide further clarity on whether this recovery is broadening.
The European Central Bank faces a more constrained path. Policymakers left rates unchanged last week but remain prepared to implement a 25-basis-point increase in September if inflation fails to moderate. However, a recent spike in oil prices tied to Middle East conflicts complicates the outlook, raising the risk of growth-destructive measures.
Many analysts view a potential September hike as the end of the ECB's tightening cycle, a factor that should continue to pressure the common currency. “We can imagine EUR/NZD drifting lower toward the 1.90 level over the next three months as RBNZ rate hikes are delivered,” said Gareth Berry, a foreign-exchange strategist at Macquarie in Singapore. The pair last traded at that level in June 2025.
Near-term momentum supports further downside. “There’s potential for further downside over next month to the 1.93 area,” said Imre Speizer, a strategist at Westpac in Auckland. “The RBNZ’s tightening cycle will likely be larger than the ECB’s.”
Jeremy Stretch, a foreign-exchange strategist at CIBC in London, pointed to broader euro headwinds. “Given near term euro headwinds, amplified by the prospect of the ECB being forced to consider growth destructive rate cuts, points to EUR/NZD trading toward the May 2025 trough,” Stretch said.
Trading volume in the New Zealand dollar has increased in recent months as the currency appreciates against major peers. Market participants are actively trading the kiwi against a broader range of counterparts, extending beyond its traditional pairings with the US and Australian dollars.
