Kiwi Set for Euro Rout as NZ Rate Hikes Outpace ECB

New Zealand's currency is expected to outperform the euro in the coming months due to expectations that the Reserve Bank of New Zealand will raise interest rates more aggressively than its European counterpart, the European Central Bank.

According to overnight index swaps, the RBNZ will increase its benchmark rate by over 1 percentage point over the next year, compared with around 75 basis points of tightening from the ECB.

This widening gap in expected interest rates is making the kiwi more attractive at a time when investors are rewarding higher-yielding currencies. Macquarie Bank Ltd. predicts that the EUR/NZD currency pair will fall to its strongest level in over a year, with a potential drop of up to 3.2% over the next three months.

While ECB officials are prepared to raise borrowing costs in September unless consumer-price pressures improve markedly, analysts expect any hike to mark the end of the ECB's tightening cycle before attention shifts towards supporting growth.