Published: February 4th, 2026
The Kiwi has climbed to the top of the G10 performance table, confounding sceptics who assumed the commodity-linked currency would struggle in a time of uneven growth and persistent geopolitical strain.
In a strategy note published this week, analysts at UBS's forex strategy unit argued that the rally still has room to run over the near term, targeting a move in NZD/USD towards 0.61. The call rests on three pillars: firmer inflation data at home, a reassessment of Reserve Bank of New Zealand (RBNZ) policy expectations, and the unwinding of heavy speculative bets against the currency.
New Zealand's fourth-quarter inflation figures, published late last week, surprised on the warm side. Quarterly consumer prices rose by 0.6%, above the market consensus, while the annual rate ticked up to just over 3%. For a central bank that has spent much of the past year easing policy to support a fragile recovery, the figures complicate the narrative.
UBS argues that the figures increase the likelihood that the RBNZ adopts a more cautious tone at its February meeting, if not an outrightly hawkish one. New Zealand's terms of trade remain favourable, domestic demand has held up better than expected, and imported disinflation is proving less reliable than hoped. The result is a narrowed gap between what markets expect and what policymakers might tolerate.
If inflation is the backdrop, positioning supplies the fuel. By the start of the year, investors had amassed one of the largest short positions in the New Zealand dollar on record. According to data tracked by several banks, the Kiwi started January as the most heavily shorted currency in the G10 complex.
Analysts at Crédit Agricole say this imbalance has been the top driver of recent price action, not only in NZD but also in its Australian cousin. When positioning reaches such extremes, even modestly positive news can trigger sharp reversals as traders rush to cover losses.
RBC Capital Markets had a blunter assessment. In a note to investors, its currency strategists point out that past episodes of extreme short positioning in NZD have ended badly for bears. In 2019, when similar conditions prevailed, the subsequent unwind lifted the currency by roughly 8%. A comparable episode in 2025 produced gains closer to 9%. History does not repeat itself, but in foreign-exchange markets it often rhymes.
Across the Tasman Sea, the Australian dollar has followed a similar path. After years of caution, the Reserve Bank of Australia (RBA) raised its policy rate by 25 basis points to 3.85% last week, the first increase since late 2023. The move itself was expected; the tone was not. By signalling that further tightening remains possible, the RBA caught markets leaning the wrong way.
Inflation, the bank noted, had “picked up materially” in the second half of 2025, reflecting capacity constraints and resilient domestic demand. Global uncertainty, it conceded, remains elevated, but so far has had little discernible effect on Australian activity. Growth among Australia's major trading partners has, if anything, surprised on the upside.
Currency markets responded accordingly. AUD/USD jumped above 0.70, while crosses such as GBP/AUD slid to their lowest levels in more than a year. Analysts at Danske Bank characterised the decision as a “hawkish hike,” one that invited expectations of follow-through rather than marking the end of a cycle. Had the RBA framed the move as a reluctant one-off, the Aussie might well have sagged on the news. Instead, it found fresh buyers.
Neither antipodean currency is immune to external shocks. In fact their sensitivity to global sentiment can be both part of their appeal, and something of a curse.
In June 2025, a sharp escalation in hostilities between Israel and Iran sent the Kiwi tumbling against every major peer. Oil prices spiked, equity futures fell, and investors flocked to traditional havens such as gold and the dollar. For a small, commodity-dependent economy far from the centres of power, the New Zealand dollar remained an easy proxy for risk aversion.
Analysts at Barclays argued that among major currencies, the Kiwi was particularly exposed to geopolitical tension, precisely because it lacked a domestic safe-haven bid. Yet that vulnerability cuts both ways. When fears recede, the same logic can work in its favour. As oil prices retreated earlier in May 2025 and markets judged the risk of a broader regional war to be contained, sentiment improved. Barclays' commodities team expected energy prices to stabilise back to recent levels, a development that would have eased pressure on risk assets more broadly.
Still, the relationship between domestic data and currency performance is rarely straightforward. In March 2025, New Zealand reported quarterly economic growth of 0.7%, marking a clear exit from recession. Ordinarily, such news would have buoyed the Kiwi and given the RBNZ greater latitude to pause its easing cycle. Instead, the currency weakened.
Analysts at Commonwealth Bank of Australia noted at the time that NZD/USD had fallen almost in lockstep with the Aussie. For two economies bound by trade, capital flows, and investor perception, decoupling is easier said than done. At times, New Zealand's fortunes are determined less by Wellington than by Sydney.
The early-2026 rally in both fiats is real, but it rests on insecure foundations. Positioning can unwind and inflation surprises can cut both ways. Central banks that appear hawkish today may soften tomorrow if growth falters. And geopolitical risks won't go away, ready to jump back into frame with little warning.
Whether the Kiwi and the Aussie can sustain their gains will depend less on heroic domestic performance than on the absence of fresh shocks, and on investors' willingness to look beyond old habits. In foreign exchange, crowded trades look comfortable until they don't.
