Asia FX

Rate hike talk boosts New Zealand dollar

New Zealand bank notes and coins
Brendon O'Hagan | Bloomberg| Getty Images

The New Zealand dollar rose to a one-month high against the greenback on Thursday after the Reserve Bank of New Zealand (RBNZ) said it is ready to raise interest rates next year, in what some analysts are calling the most hawkish comments from a major central bank.

The currency rose above US$0.8090 to its highest level since August 19 after RBNZ Governor Graeme Wheeler said that an increase in the official cash rate will likely be required next year, following the central bank's decision to leave its main cash rate unchanged at 2.5 percent during Thursday's policy meeting.

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"This is the most direct signal of monetary tightening that we have heard from any of the G20 nations and this bias should be extremely positive for the New Zealand dollar," Kathy Lien, managing director of FX strategy at BK Asset Management, said in a note.

The currency has gained over 2 percent against the greenback over the past three months and surged over 4 percent against its Australian counterpart during the same period.

Expect more upside ahead for Kiwi
Expect more upside ahead for Kiwi

"We have seen emerging markets stabilizing and this is encouraging traders [to move] back into the carry trade and the New Zealand dollar stands out here given it has the highest interest rates in G10, but also easily the highest real rates with ten year bond at 4.77 percent minus inflation at 70 basis-points," said Chris Weston, market strategist at IG.

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In its policy statement, the central bank expressed concern about the currency's elevated levels and its impact on economic rebalancing. Governor Wheeler added that a gradual reduction in the Federal Reserve's bond-buying program would help curb some of the Kiwi's strength.

Despite those concerns, analysts still predict more upside for the currency against major crosses.

"As these are the most hawkish comments that we have heard from a major central bank, investors could start to see the New Zealand dollar in a new light and drive the currency up another 3 to 5 percent [against the greenback]," Lien added.

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"Over the next six months, we have a forecast of the Aussie-Kiwi cross heading down towards NZ$1.11 or NZ$1.12, and it's quite easy to see why. The RBNZ is going to be the first major central bank to be hiking rates as early as March of next year while the RBA is on hold, so from that yield differential perspective, it's just going to push the Aussie-Kiwi lower," said Khoon Goh,senior FX Strategist at ANZ on CNBC's "Squawk Box Asia."

The Bank of Korea also left interest rates unchanged Thursday as widely expected. Bank Indonesia and the Philippines' Bangko Sentral, who also have rate decisions today, are expected to follow suit after the recent shake-out in emerging markets due to an exodus of capital.

— By's Nyshka Chandran. Follow her on Twitter @NyshkaCNBC