New Zealand Dollar Recovery Risks Being Quashed by Orr

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

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The New Zealand Dollar reached new 2020 highs against the U.S. Dollar Tuesday but may be the target of incendiary remarks overnight and into Wednesday as Reserve Bank of New Zealand (RBNZ) Governor Adrian Orr addresses an audience for the first time since being "outdoved" by the Federal Reserve (Fed).

Governor Adrian Orr will address the Institute for Government and Policy Studies from Victoria University's Wellington School of Government on Wednesday at 01:30 London time and investors as well as the Kiwi Dollar will be listening closely given the RBNZ's recent efforts to keep a lid on the currency. 

"NZD/USD lifted towards 0.6760 because of the weaker USD. RBNZ Governor Orr’s speech on the monetary policy response to covid‑19 tonight may have a large influence on NZD if he again indicates a strong willingness to deliver more stimulus," says Kim Mundy, a strategist at Commonwealth Bank of Australia. 

Orr takes to the stage with the New Zealand Dollar trading at its highest level since December 2019 following Tuesday gains that led NZD/USD above the 61.8% Fibonacci retracement of its July 2017 downtrend at 0.6766, before the Kiwi stalled upon contact with its 200-week moving-average at 0.6785. 

Above: NZD/USD rate shown at daily intervals.

Both represent major technical resistance barriers that effectively the last impediments standing between the Kiwi and highs not seen since December 2018. Price action comes amid an ongoing rout in U.S. exchange rates and after China's Caixin manufacturing PMI surprised on the upside for August.

However, Kiwi Dollar gains may have stoked further concern at the RBNZ, which has sought to constrain the currency ever since New Zealand emerged as one of the first countries to have largely contained the coronavirus. 

"Having been “out-doved” by the Fed, the RBNZ is likely going to up its own dovish rhetoric in coming weeks as it does what it can to lean into the NZD, which is so crucial for growth and inflation. Tomorrow’s speech by RBNZ Governor Orr thus presents downside risks," says David Croy, a strategist at ANZ. "The Kiwi did make a fresh high for the year as the USD came under pressure. Correspondingly, the USD DXY index made a fresh cycle low and is back on the skids. This has been (and looks set to continue to be) a key feature of the market, and speaks of the NZD performing less well on crosses."

The RBNZ has lifted its quantitative easing allowance from NZ$60bn to NZ$100bn in recent weeks while keeping the threat of negative interest rates as well as foreign asset purchases (large sales of Kiwi Dollars) on the table to dissuade investors from buying the currency. 

It's concerned about what a strong currency will do to the competitiveness of Kiwi exports and the inflation outlook. A stronger currency makes goods produced in New Zealand more expensive while reducing the cost of imports, which then undermines long-insufficient inflation pressures. 

The RBNZ had for years sought to coax inflation above the midpoint of the 1%-to-3% target and had only just succeeded before the coronavirus struck. Now, and with the Fed having "outdoved" the Kiwi central bank last week, the risk of incendiary remarks from Governor Orr on Wednesday is meaningful.

Above: NZD/USD rate shown at weekly intervals with Fibonacci retracements of summer 2017 downtrend.

"The idiosyncratic downside pressure to NZD from rising Reserve Bank of New Zealand rate cut expectations has surely run out of steam and we may need fresh dovish comments by the Bank to possibly re-ignite NZD weakness, as the easing of restrictions in Auckland is offering a slightly less worrying economic picture to investors," says Francesco Pesole, a strategist at ING. 

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The Fed said Thursday it will deliberately foster above-target inflation and that interest rates will still remain pinned to the floor as price pressures rise. Previously above-target inflation could've been likely to incite an interest rate rise but now the Fed says it will leave rates at record lows to actively foster above-target inflation in order to make amends for past as well as present periods where the bank has fallen short of the objective for 2% price growth. 

The policy shift was in line with what many analysts were expecting but implies further falls in the 'real' bond yields, or inflation-adjusted returns earned by investors, that were widely cited as being behind declines in the Dollar over recent months as well as late last week.

Investors' extreme bearishness on the Dollar has enabled NZD/USD to rise even as the RBNZ leant against the currency with increases to its quantitative easing programme and dovish rhetoric although now, it's not clear what more the bank could say rather than do in order to keep a lid on the Kiwi. 

"[GBP/NZD is] holding steady at elevated levels, having also switched from a downtrend to an uptrend. A remarkable turn of events," ANZ's Croy writes in a morning note to clients.

Above: Pound-to-New Zealand Dollar rate shown at daily intervals.