New Zealand's Covid-19 "Elimination Strategy" will cost Economy and New Zealand Dollar says BNZ

- NZ policy on covid-19 now a drag on NZ Dollar
- -ve interest rates at RBZN to weigh on NZ Dollar outlook
- See the latest forecasts for NZD

Above: File image of Prime Minister Ardern. Image © NATO, reproduced under CC licensing conditions, image cropped from original.

• GBP/NZD spot rate at time of writing: 2.0084
• Bank transfer rates (indicative guide): 1.9380-1.9522
• FX specialist rates (indicative guide): 1.9460-1.9900
• More information on bank beating rates available to you, here

The New Zealand economy and its currency will likely struggle under the New Zealand government's apparent policy of covid-19 elimination, according to analysts at local lender BNZ who say they have cut their New Zealand Dollar projections.

The outlook for the economy took a fresh blow last week when the New Zealand government announced fresh lockdown measures in an attempt to isolate, contain and ultimately eliminate a fresh cluster of covid-19 infections.

While the strategy has been lauded by some international political commentators, economists point out that such an aggressive approach to containing the virus does carry significant economic costs that leaves the country at a disadvantage relative to those which pursue a policy of containing the virus.

BNZ say the move to Level 3 lockdown in the Auckland region and a Level 2 lockdown across the rest of the country will will likely knock 1-2% off the country's GDP in the third quarter.

"This estimate will grow if the restrictions are extended. It is clear the government is still on an elimination rather than suppression strategy, which ultimately raises the question of whether the country will face ongoing lockdown restrictions over the next year or two. If that is the modus operandi then, economically speaking, this could potentially be quite damaging and is clearly NZD-negative, a possibility that needs to be priced in," says Jason Wong, Senior Markets Strategist at BNZ Bank in New Zealand.

The New Zealand Dollar has been an underperformer on global foreign exchange markets over the past month thanks to the markets response to the reintroduction of lockdown measures in New Zealand, as well as communication from the Reserve Bank of New Zealand that a negative interest rate might well be introduced in coming months.

The Pound-to-New Zealand Dollar exchange rate has rallied to above 2.0 in the wake of the RBNZ's August policy update where it was confirmed negative interest rates are likely, while the New Zealand-U.S. Dollar exchange rate has fallen from early August highs of 0.67 to current levels around 0.6529.

The NZD/USD weakness is exceptional given the broad based U.S. Dollar sell-off that has characterised recent weeks and serves to underpin just how significant the RBNZ's stance is for the outlook of the currency.

"The overall message was an increased commitment to drive NZ rates lower, and hold them down for a longer period. We saw this as an increased probability of the Bank adopting a negative OCR next year," says Wong.

Economists at BNZ have now revised their policy forecasts to account for a 0.50% cut in the OCR in March 2021, and a further cut of 0.25% in August.

"In addition to the government’s COVID19 strategy, the 2.0% RBNZ’s determination to lower interest rates and crank up its money printing operations are also NZD-negative," says Wong. "We believe it is prudent, in the first instance, to lower our NZD projections."

The NZD/USD exchange rate is now forecast at 0.65 by the end of September, 0.66 by year-end, 0.67 by the end of March and 0.68 by mid-2021.

At the same point in time, the GBP/NZD exchange rate is forecast at 2.0, 2.08, 2.08 and 2.04.

Learn more here about protecting your budget by locking in current NZD rates for a point in the future, or set an order to automatically buy currency when your ideal rate is reached.