The Australian and New Zealand dollars concluded the trading year on a stable footing this Wednesday, securing substantial annual gains against the US dollar. This strength stems from growing investor belief that the next shift in domestic interest rates could be upward, not downward.
AUD and NZD Performance: A Year in Review
The Australian dollar, commonly known as the Aussie, held steady at $0.6695. This level is not far from its recent peak of $0.6727, which was its highest point in 14 months. For the entire year of 2025, the currency has appreciated by an impressive more than 8%, a remarkable recovery from its low of $0.5910 hit in April during market turmoil. Analysts now see the next significant resistance levels at the 2024 high of $0.6943 and then $0.7158.
Across the Tasman Sea, the New Zealand dollar, or the Kiwi, was trading quietly at $0.5787. It recorded a more moderate annual gain of 3.5%. The currency finds immediate support at $0.5736, while facing resistance at its recent three-month top of $0.5853.
Inflation Heat Fuels Reserve Bank of Australia Speculation
The primary driver behind the Aussie's rally has been unexpectedly high inflation readings. This has sparked intense speculation in financial markets that the Reserve Bank of Australia (RBA) might increase its current cash rate of 3.6%. The central bank's next policy meeting on February 3 is now a critical date to watch.
Forecasts from Australia's major banks are divided. Commonwealth Bank (CBA) and National Australia Bank (NAB) are predicting a rate hike in February. Conversely, ANZ and Westpac expect rates to remain on hold throughout 2026, though they acknowledge the risk is tilted towards tightening.
Market pricing currently suggests approximately a 30% chance of a hike in February. This probability rises to 50% for March and jumps to around 80% by May. The upcoming economic data will be decisive in shaping these expectations.
Upcoming Data: The Make-or-Break for Policy
The future trajectory of interest rates heavily depends on whether inflationary pressures show signs of cooling. All eyes are on the monthly Consumer Price Index (CPI) data for November, scheduled for release next week. Analysts are hoping for a moderation in core inflation, which reached 3.3% in October—its highest level since mid-2024.
The more comprehensive CPI report for the December quarter is due on January 28. Analysts suggest that a core inflation increase of 0.9% or more would significantly increase pressure on the RBA to act quickly with a rate hike. A reading of 0.7% might be enough to delay tightening, while 0.8% is considered a very close call.
In New Zealand, the Reserve Bank of New Zealand (RBNZ) appears to have finished its easing cycle, having delivered a likely final rate cut in November. It reduced rates by a substantial 225 basis points in just over a year. A brief pickup in domestic data led some investors to consider the possibility of a hike by mid-2026, but the new central bank governor forcefully dismissed such notions.
As a result, markets now see little chance of an increase to the 2.25% cash rate before July, with the probability priced at about 40%. The chance rises to an implied 70% by September. Furthermore, a quarter-point rate cut is fully anticipated for October.
