New Zealand Dollar Forecast Lower amid Speculation of Negative Rates at RBNZ 

- NZD forecast to fall as RBNZ edges toward negative rates.

- Looming general election could also weigh on NZD ahead.

- But these three-month forecasts come amid NZD strength.

- Easing lockdown to heap more pressure on GBP/NZD rate.

Above: File image of RBNZ Governor Adrian Orr at a press conference. Image courtesy of RBNZ.

- GBP/NZD spot at time of writing: 2.0409
- Bank transfer rates (indicative): 1.9697-1.9839
- FX specialist rates (indicative): 2.0105-2.0227 >> Get your quote now

The New Zealand Dollar continued to shrug off new forecasts of negative interest rates at the Reserve Bank of New Zealand (RBNZ) on Wednesday although some projections suggest it's ony a matter of time before the Kiwi experiences another bout of weakness.

New Zealand's Dollar was the second best performing major currency on Wednesday and was also second placed in the rankings for the April month as investors continued to reward a best-in-class effort to contain the deadly coronavirus after around one quarter of the labour force was allowed to return to work on Tuesday, in response to a sharp decline in an already-low number of new infections detected over the last fortnight. 

"New Zealand can count itself as one of the most successful countries in the world in managing to almost eliminate Covid-19 from within its border, at least for now. However, the economic cost of its strict shutdowns is set to be high. Consequently, not only has more fiscal spending been promised in the May budget, but the market is anticipating further monetary policy adjustments at the May 13 RBNZ meeting," says Jane Foley, a senior FX strategist at Rabobank. "As a consequence the NZD is vulnerable."

Above: New Zealand Dollar performance against major rivals in April. Source: Pound Sterling Live.

Kiwis were still in a state of national emergency on Wednesday but had moved to alert level 3 from alert level 4 previously after the country, which has a population of 4.8 million, detected just single-digit numbers of new coronavirus infections each day over a fortnight. New Zealand closed its doors to travellers from China in the first week of February and effectively shut its borders to the world in late March, before entering its own form of lockdwon on March 23.

Around a quarter of the labour force was able to go back to work Tuesday after the national effort to contain the pneumonia-inducing disease proved a success, but the borders remain closed and are expected to stay that way for some time. This will deal a significant and ongoing blow to the Kiwi economy given that the population of New Zealand oftens swells by more than 300k each month, upwards of 6% of the total population, as a result of tourist flows.

The export sector might also face headwinds given a slower pace of containment elsewhere in the world.

"Speculation has been mounting that Governor Orr will announce an expansion to the new QE programme. Additionally, talk has been circulating that the central banks could push interest rates below zero. As a consequence the NZD is vulnerable," Foley says. "We see scope for NZD/USD dipping lower towards 0.57 on a 3 month view."

Above: NZD/USD rate shown at weekly intervals.

Expectations of a large ongoing hit to GDP led Westpac to cut forecasts for interest rates at the RBNZ Tuesday, with the influential Aussie lender now looking for the central bank to experiment with negative rates from November and possibly increase the size of its bond yield and currency-crushing quantitative easing programme as soon as next month. Such a policy bent policy might create an inhospitable environment for the Kiwi Dollar although the Antipodean currency has been unfazed thus far. 

The Kiwi is up 2.45% against Sterling in April and 3.19% against the U.S. Dollar having pushed the Pound-Kiwi rate back below 2.04 while lifting the NZD/USD rate back above 0.60, demonstrating strength that could continue for a little while yet irrespective of what the Reserve Bank of New Zealand does in the short-term. Given the headstart on the coronavirus recovery and a relatively stronger or more investor friendly financial position to begin with, the Kiwi might be apt to continue outperforming other major currencies in the short-term. And especially if the mood in the broader market remains upbeat and hopes of a global easing of lockdown measures elevated. 

"NZD/USD remains at the mercy of global risk sentiment near term, with potential for upside during the next few weeks. Economic data releases over the next few months will be dire, denting sentiment further. Moreover, we expect the RBNZ to cut the OCR to -0.50% in November. There’s potential to see 0.5800 during the next few months," says Imre Speizer, Wesptac's NZ strategy head. 

Above: GBP/NZD at weekly intervals. Fails to sustain break above 78.6% Fibonacci retracement of referendum downtrend.

The RBNZ has typically been hostile to strength in the Kiwi Dollar but the rub for the bank this time out is that after having contained the coronavirus before most other countries, New Zealand is also likely to emerge from the crisis without its national balance sheet being in tatters. Relatively speaking, the country had a strong financial position to begin with given debt-to-GDP of little more than 20% and government books that were about balanced. 

Moody's has took stock of this relative strength, illustrating the extent to which the Kiwi currency may be able to avoid the kinds of debt sustainability concerns that could dog other currencies like the Euro, Pound and even U.S. Dollar over the short, medium and long-term. Those debt concerns are elevated in the UK, where the debt-to-GDP ratio was already 80% odd before the coronavirus and the budget deficit is expected to reach double digit percentages this year.

Concerns about debt sustainability, the current account deficit, the Brexit process and a looming deadline for the UK to request an extension of the Brexit transition are all expected to weigh on Sterling up ahead and when combined with possible ongoing short-term strength in the Kiwi, this could spell further downside for the Pound-New Zealand Dollar rate heading into the summer. 

"The country is still due to go to the polls on September 19. Currently, Ardern’s leadership of the crisis is garnering strong support while polls are indicating that support for the opposition National party is falling sharply. There is a rocky road for the economy to pass through between now and September. This could bring additional volatility for the NZD," warns Rabobank's Foley.