Published: November 28th, 2020
The New Zealand dollar (NZD) continued its forward march this week, edging past 70 cents per dollar as forex traders priced out the risk of negative borrowing costs.
The kiwi rose as high as 70.01 cents against the greenback, given a jolt by a broader risk-on sentiment as markets welcomed the rollout of US President-elect Joe Biden's cabinet announcements and more successful trials of Covid-19 vaccines.
NZD outgunned major currencies in a global rally of risk assets at the start of the week, given a kickstart by Finance Minister Grant Roberston’s letter to the Reserve Bank of New Zealand (RBNZ) citing concerns about a housing bubble.
Robertson said he’s worried rising house prices might scuttle the country’s recovery and asked central bankers to consider monetary policy options that could address the problem.
Bank officials responded by noting that they already take housing market developments into account when setting policy, and suggested other state finance departments had a bigger influence over the market. Robertson responded noting the role that the country’s restrictive planning rules might play in pushing house prices up.
Analysts said the exchange of letters could signal a significant structural change in New Zealand monetary policy and lead to a more aggresive central bank. The long-term effect could be a structurally higher NZD, a development the Labour government would want to avoid.
Markets appear to be judging the government's focus on interest rates and housing prices as signs that the RBNZ will pull back from threatening further cuts, which should support the currency's outlook.
Strategists at Australia and New Zealand Banking Group (ANZ) told journalists that risks look to be ‘skewed higher for the NZD’ as New Zealand is widely seen as being ahead of other countries in terms of readiness to benefit economically from a COVID-19 vaccine.
New Zealand has led the pack in its efforts to limit the coronavirus, and its economic recovery looks even more robust than markets and politicians had anticipated. New Zealand already had a government balance sheet considered best-in-class by economists.
This has added even more shine to NZD in a period where commodity currencies were starting to see an uptick in demand based on vaccine optimism and the global economic recovery everyone hopes for in 2021.
Adding to the enthusiasm, the New Zealand Treasury announced at mid-week that debt-to-GDP would settle at 27% at year-end, less than the 29 per cent forecast attached to the national budget. For context, the UK’s national debt stepped over the 100 per cent line in Q3.
Despite strong economic indicators, New Zealand central bankers have only just started to pull back from threats to drop the cash rate below zero next year, in an effort to underpin economic recovery and keep a tight leash on Kiwi exchange rates. RBNZ slashed its cash rate to 0.24 per cent in February and has since announced plans to purchase up to 100 billion NZD worth of government bonds to push down financing costs across the economy.
Record-low interest rates are putting downward pressure on mortgage rates, degrading the value of household savings and adding to already surging demand for residential property in the major cities.
Median house prices have risen by 19.7 per cent from October 2019, when the average cost of a house in Auckland rose to 1 million NZD for the first time.
Currency Strategists at Rabobank said lower rates are required to sustain healthy rates of inflation, but they also push home prices ‘through the roof’. They suggested that macro-prudential measures to limit mortgage lending may be required.
The kiwi was ahead of other major currencies amid a rally in stock markets and risk assets generally. Markets seem to have heaved a sigh of relief after current US President Trump's announced work had begun to hand over to the incoming Biden administration, allaying fears of post-election chaos and legal challenges to state-by-state vote counts.
While Trump is still publicly arguing the outcome, markets cheered Biden’s announcement that former Federal Reserve Chair Janet Yellen would serve as Treasury Secretary in his next administration.
Many commodity-sensitive currencies like NZD Kiwi saw a lift this week ignited by both progress on vaccines to battle the pandemic and initial speculation that a last-minute Brexit deal may be in the works.
The US election has driven an unsettled 2-3 month period for the dollar that frequently saw it trade lower against NZD and other oil and natural resource currencies like AUD and CAD.
Combined with weakness in safe-havens like the Japanese yen and Swiss franc, CAD, AUD and NZD have performed well against the greenback, suggesting that markets have settled into risk-on sentiment on expectations of stability and a ‘return to normal’ under a Biden presidency.
In early November, NZD/USD saw gains of 2.18 per cent or more in a rally sparked by the first projections of a Democratic win for the White House — and even majorities in the Senate and House of Representatives. A buying frenzy drove-up NZD and its brethren commodity fiats at the greenback’s expense.
US election news has driven much of the movement in global currency markets since October. Now that the dust has settled markets expect a less disruptive American approach to trade relations with China. A more settled geopolitical environment could continue the slide of safe havens, while commodity currencies may strengthen further.