New Zealand Dollar Buys Government Optimism but Analysts Still Wary of RBNZ 

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• GBP/NZD spot rate at time of writing: 1.9150
• Bank transfer rate (indicative guide): 1.8480-1.8614
• FX specialist providers (indicative guide): 1.8863-1.8978
• More information on FX specialist rates here

The New Zealand Dollar outperformed Friday having gotten the better of all major counterparts, aided by Finance Minister Grant Robertson who suggested that a stronger-than-expected economic recovery might be likely to temper a dovish Reserve Bank of New Zealand, although analysts still expect the RBNZ will resort to a negative cash rate next year. 

New Zealand Finance Minister Grant Robertson cheered second quarter GDP figures that were less bad than economists feared, and reportedly said that a stronger than expected recovery would likely be taken into account by the Reserve Bank of New Zealand when policymakers determine the interest rate outlook for after March 2021.

This was after Statistics New Zealand said the economy shrank by -12.2% in the second quarter, a record decline but one that was smaller than the -12.5% that was anticipated. It also came with an upward revision to Stats NZ’s estimate of the first quarter contraction, which was lifted from -1.6% to -1.4%. 

“NZD/USD rose by 0.5% to around 0.6780 following New Zealand Finance Minister, Grant Robertson’s upbeat comments,” says Carol Kong, a strategist at Commonwealth Bank of Australia. ”Robertson said the RBNZ is committed to maintaining the official cash rate (OCR) at 0.25% until at least March.  He said the RBNZ will take into account the strength of economic recovery when considering the interest rate outlook next year. Our ASB colleagues continue to expect the OCR to be cut by 75bp to ‑0.50% in April 2021. A negative interest rate outlook for New Zealand underpins our forecast for a higher AUD/NZD.” 

Above New Zealand Dollar performance against major counterparts on Friday. Source: Pound Sterling Live. 

New Zealand’s Dollar and investors have been put on notice by the RBNZ, which has repeatedly flagged a likely imminent shift to a negative interest rate regime and warned that it could resort to foreign asset purchases as a means of supporting the Kiwi economic recovery. 

This has left derivative markets pricing-in an early 2021 foray below zero by the RBNZ cash rate, which would make Kiwi government bonds less attractive to investors of all kinds, foreign and domestic while weighing on Kiwi exchange rates. Asset purchases would involve large sales of New Zealand Dollars.

“For retail customers, the message is simple. Our observation across the globe is that retail deposit and borrowing rates don’t tend to fall below zero when wholesale rates are negative. We expect the same for NZ interest rates. For borrowers, rates are expected to approach (or set) record lows, but don’t expect the bank to pay you to take out a loan,” says Mark Smith, a senior economist at ASB, CBA’s Kiwi sibling. "In principle, adopting a negative policy interest rate would not change the way in which monetary policy works, which is to encourage spending over saving and to encourage economic activity."

“The NZD would also be lower than it would otherwise be, which would support the export sector,” Smith adds.

The RBNZ is seeking to prevent long-term damage to the economy as a means of safeguarding its ability to deliver 2% inflation in line with a statutory target, although it’s on the verge of having gone further in this mission than any other developed world central bank.

A negative rate policy will be felt across the economy but first and foremost by the New Zealand Dollar, which has recovered strongly from March lows due to an effective coronavirus containment, economic recovery in China and improved investor risk appetite.

Above: NZD/USD at weekly intervals with 200-week moving-average (black) and Fibonacci retracements of 2017 downtrend.

NZD/USD was testing its 200-week moving average at 0.6782 on Friday but in the absence of a change of course, RBNZ monetary policy could upend the New Zealand Dollar rally in the months ahead. 

“NZD will be more challenged than other countries as the RBNZ prepares to take rates negative, and as bond yields here move further below their global counterparts. But it’s a patience game, and plenty are willing to own the NZD for now,” says David Croy, a strategist at ANZ. “The BOE’s call for negative rates has lifted the possibility of the rally extending to 0.5260 [ NZD/GBP].” 

New Zealand’s Dollar isn’t the only currency to be hampered by the threat of negative interest rates because the Bank of England (BoE) said again Thursday that preparations are also underway in London.

ANZ says the BoE’s policy bent is an additional factor that could help push the the Pound-to-New Zealand Dollar rate back to 1.9011, but Sterling also has to navigate the elevated possibility of a ‘no deal’ Brexit at year-end, which could open the door to much lower levels. But for the time being at least, the Pound-to-Kiwi rate enjoys the nearby support of a major Fibonacci retracement level at 1.9099 and its own 200-week moving average at 1.9085.

“In the absence of an improvement in the trade talks, sterling is likely to remain under pressure. The end of the furlough scheme and rising unemployment are disinflationary. The surge in the debt stock is bringing forward calls for a rise in the tax burden,” says Brian Martin, an ANZ colleague of Croy’s. “Policy will stay very loose for an extended period. That can include additional quantitative easing and potentially negative interest rates. Paul Tucker, a former deputy governor of the BoE, argued some years back that the effect of negative interest rates would be to depreciate sterling. The experience of the euro was very much that. We therefore advise continuing to trade sterling from the short side.”

Above: GBP/NZD at weekly intervals with 200-week average (black) & Fibonacci retracements of post-referendum recovery.