A recovery in the New Zealand Dollar is "now well underway", according to the Bank of New Zealand (BNZ), due to a strong labour market, the need for the central bank to further hike rates and hopes for a progressive move away from China's zero-Covid policy.

"Since the beginning of October, the NZD has been one of the best-performing major currencies, driven by multiple factors," stated BNZ's New Zealand FX strategist Jason Wong.

The New Zealand Dollar underperformed for most of Q3, according to Pound Sterling Live, yet rallied at the end of last month and into November.

Wong added: "NZ labour market data indicated a still very tight labour market, with the unemployment rate steady at 3.3% and strong wages inflation."

The country's labour market is of special relevance to the central bank's policy, as it indicates it would be too soon to contemplate bringing rate hikes to an end.

"The data were the last key domestic indicators ahead of the RBNZ's 23 November MPS, and there are differing opinions on whether the Bank should or shouldn't step up with a jump 75bps hike at the meeting," stated Wong.

Markets show 62 basis points of rate rises are expected by investors, the report adds.

In regard to China, BNZ says the Dollar's sensitivity to China's outlook is crucial, particularly regarding forecasts its zero-Covid stance may be relaxed.

"We think it's best not to think of the policy as a binary decision, but a gradual policy change that sees a gradual fading of one NZD headwind that has been in place through 2022," Wong added.