New Zealand Dollar Outlook: Democrat Clean Sweep an "Upside Risk" says ANZ

- Near-term NZD exposed to losses
- Uncertainty rising as U.S. elections approach
- But ANZ see smoother sailing for NZD ahead

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• GBP/NZD spot rate at time of publication: 1.9465
• Bank transfer rates (indicative guide): 1.8780-1.8920
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The New Zealand Dollar lost ground against the Euro and U.S. Dollar in September amidst an environment of falling investor confidence and rising expectations for the Reserve Bank of New Zealand to introduce negative interest rates.

However, the New Zealand currency is being tipped by analysts at ANZ Bank to see an improved performance into year-end, particularly if the Democrats make a clean sweep of Congress and the Presidency in the November vote.

"A Democratic sweep remains a key upside risk for the NZD, which would likely sow the seeds for a sustained period of global growth," says Rahul Khare, FX Analyst at ANZ in Sydney.

Polls have a consistent lead for Democratic candidate Joe Biden, and given that pollsters have adjusted their methodology to avoid missing Trump's 'hidden' support, markets are steady in pricing a Biden victory.

Regardless, uncertainty will nevertheless remain a feature of the near-term timeframe with investors unwilling to shake the fear of a close result which could result in weeks of legal challenges, creating conditions for financial market weakness.

"The current USD volatility term structure suggests that investors expect uncertainty to persist after Election Day and to peak around 23 November. That said, the real deadline may be 8 December when, by law, all post-election disputes must be settled," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

The near-term cocktail of uncertainty has been stirred on October 02 with news that U.S. President Donald Trump has tested positive for covid-19.

The implications for near-term New Zealand Dollar moves will likely be unclear but a rule-of-thumb that the New Zealand Dollar loses value when markets are falling should be remembered.

But looking beyond the turbulent electoral period, ANZ see smoother sailing for the Kiwi.

"Despite the recent pull-back, we expect global liquidity to be a tailwind for risk sentiment. Political uncertainty around the US election is likely to chill confidence at the margins, with nuance around the outcome likely to be more consequential than the actual choice for President," says Khare.

The New Zealand Dollar is a 'risk on' currency that tends to rally when investor sentiment is improving and stock and commodity markets are rising. Should a strong year-end rally ensue in risk markets, most likely on a market-friendly resolution to the November vote, the New Zealand Dollar would therefore understandably be better supported.

"While the extent of recent weakness remains to be seen, we expect the risk recovery to support the NZD. This upside will likely be capped against the USD and JPY by aggressive central bank policy; while against higher beta crosses (AUD and Asia) relative rate differentials are likely to lead to downside pressure on NZD,"

On the domestic front, ANZ says it is important for the Government to maintain support for the economy as it looks to recovery the losses suffered under lockdown.

"The recovery is dependent on a fiscal policy pivot towards growth and productivity, and it is crucial that this support is not withdrawn prematurely," says Khare.

On the all-important issue of RBNZ policy, ANZ says while negative rates remain a story for 2021, continued asset purchases, a Funding for Lending Programs (FLP) and the possibility of foreign asset purchases will continue to flatten the NZGB curve and lower rate differentials.

This dynamic has been cited by the analyst community as being a key driver of New Zealand Dollar underperformance over recent months.

The New Zealand-U.S. Dollar exchange rate is forecast at 0.65 by year-end at ANZ, a levelled it is being tipped to maintain through 2021.

The Pound-to-New Zealand Dollar exchange rate is meanwhile forecast at 1.97 by year-end and 1.89 by mid-2021.

The Euro-to-New Zealand Dollar exchange rate is forecast at 1.86 and 1.82 for the same timeframes.