Published: September 10th, 2021
FX Strategists at NatWest Markets in London say they’re ‘staying long’ on the New Zealand dollar (NZD), adding further upside to the kiwi after a period of outperformance.
In an investor note on Wednesday, NatWest analysts said NZD is set for further gains thanks to signals that the Reserve Bank of New Zealand (RBNZ) intends to raise interest rates and improve investor sentiment for the country's economy despite new Covid restrictions announced earlier this week.
Markets now believe the RBNZ will lift interest rates on 6th October at its next policy committee meeting. Expectations are for a rise of at least 25 basis points (BPs) in the context of a resilient economy that keeps on chugging, a situation at odds with the central bank’s overly cautious policy of record-low interest rates.
‘While we think there’s ample evidence that macro-economic trends support the robust stance on interest rates. That said, there is still a risk premium to factor in thanks to COVID-19,’ said NatWest FX strategists.
If there’s a potential fly in the ointment for an NZD-supportive rate rise this year, it’s the possibility of a deterioration in the country’s Covid situation. New Zealand has been lauded throughout the cress as an exemplar of how fast and decisive action can keep the pandemic at bay. The rise of the virulent delta variant, however, means all bets are off. On Thursday, the government extended Auckland's level-4 alert restrictions for another fortnight.
Recent events also support NatWest's evaluation. In August, the kiwi was the second-best performer amongst G10 majors and only gave ground occasionally to the Norwegian Krone.
GBP/NZD reached a tenth day of successive declines, while NZD/USD rose from an August low of 0.6804 back to levels above 0.7048.
Those August lows dipped when the RBNZ unexpectedly chose to leave interest rates at record-low levels, ignoring market expectations for a rise. The central bank said the surprise imposition of new coronavirus lockdowns prompted the delay, not any change to the country’s economic fundamentals.
When expectations for higher interest rates are back on the table, kiwi exchange rates respond rapidly.
In fact, the RBNZ’s policy committee looks keen to keep market expectations for higher rates alive. Recent announcements have suggested the central bank is still fully committed to higher rates, and markets are reading it as an opportunity to hold or buy more NZD.
RBNZ Assistant Governor Christian Hawkesby told Reuters this week that the bank ‘could have easily supported a raise to the official cash rate.' Still, given that it was scheduled to make an announcement on the same day the government announced new lockdowns, the bank believed the timing might have roiled markets unnecessarily.
Central banks aren't usually so forthright in telegraphing their intentions, another sign that the RBNZ is eager to start hiking rates.
Fundamental support for a raise in rates includes labour shortages, inflation levels being above the RBNZ’s target, and rising house prices which all point to rising inflation.
NatWest also cites July's jump in imports as a reason why domestic demand is likely to remain robust. The bank also sees upside for NZD against the Australian dollar (AUD).
The NZD/USD exchange rate, meanwhile, is forecast to finish 2021 at 0.72 ahead of a move to 0.75 by mid-2022, the bank says. GBP/NZD is expected to end 2021 at 1.97, before a fall to 1.90 by April 2022.
The New Zealand Dollar received a jolt in late August when Auckland made a shock announcement that a three-day snap lockdown would be imposed in response to a single COVID-19 case. The new restrictions by one of the world's leaders in fighting the spread of COVID spooked markets and meant that the RBNZ would err on the side of caution and leave interest rates as-is for the near term.
Prime Minister Jacinda Ardern said the decision to re-impose lockdowns on the entire country was an extension of her government’s pandemic policy of ‘go hard and act fast.
The decision landed just a few hours in advance of a much-anticipated RBNZ meeting where investors were expecting the central bank to announce an interest rate rise, a move that would have supported firmer valuations of NZD.
But a long list of forex analysts now believe that the RBNZ will put off a rate rise, despite an apparent eagerness to raise rates signalled in previous statements.
Indeed, pushing for higher interest rates in New Zealand while the Delta variant exceeds the thresholds set by 'zero covid' countries like Australia and China suggests the pricing for a substantive rate hike from RBNZ anytime soon may be overly optimistic.
The pound-to-New Zealand dollar rate jumped by more than a full percentage point following the lockdown announcement to trade at 1.9942, while the NZD/USD rate quoted at 0.6924, 1.45 per cent drop.
‘Delta has been a game-changer,’ said Ardern in a press statement. ‘The best thing we can do now is act decisively and take steps to get out of this as quickly as we can.’
New Zealand has been on alert level four all week, which means all public venues, schools, and public-facing businesses like retail shops and restaurants must close. Only stores selling essentials like household groceries, petrol, and pharmacies are allowed to remain open.
Those moves will undoubtedly impact the country’s economic growth this quarter and cast a chill on markets as business and consumer confidence dips. That could also hold the RBNZ back from acting to raise interest rates.
Following the lockdown announcement, economists at Société Générale told le Monde that expectations for an RBNZ rate rise anytime soon were now unlikely.