New Zealand Dollar Forecast Higher after RBNZ Cheers Policy and Exchange Rate Success 

- NZD's short-term upside grows as market u-turns on RBNZ outlook.
- Seen taking second 2nd run at 0.70, 0.71 "plausible" says Westpac. 
- CBA tips more AUD & NZD outperformance with AUD out in front. 

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• GBP/NZD spot rate at time of publication: 1.9108
• Bank transfer rate (indicative guide): 1.8440-1.8570
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The New Zealand Dollar is forecast to remain a relative outperformer over the coming weeks and could even have scope to achieve levels not seen since April 2018, according to Westpac, as a robust economic recovery helps sustain a recent turnaround in the Reserve Bank of New Zealand (RBNZ) policy outlook. 

New Zealand's Dollar was creeping higher against many major currencies again on Wednesday after RBNZ Governor Adrian Orr appeared to celebrate a mission accomplished on behalf of the Kiwi economy in the bank's latest monetary policy report. 

Orr says that business failures, unemployment and soured loans have all come in lower than was expected by the bank just a few months ago while momentum in economic activity has proven to be stronger than was hoped for. 

"Low interest rates have also supported the economy by lowering barriers to invest, improving cash-flows, and ensuring the New Zealand dollar exchange rate remains competitive. This stimulus will continue to support the economic recovery," the governor said before later noting the Kiwi could be somewhere between 5% and 10% higher than it was on Wednesday had it not been for the actions of the Monetary Policy Committee. 

The RBNZ's apparent perception of a job well done somewhat vindicates the financial markets for having about-turned in recent weeks on wagers that Kiwi policypakers would cut the cash rate below zero once into the New Year, which had previously posed as a heavy burden for the New Zealand Dollar to carry. 

Source: Westpac. Overnight Index Swap (OIS) market expectations for G10 cash rates on Nov 25. RBNZ shown in purple. 

As far as the market is concerned, those rate cuts are now largely off the table, as can be see on the graph above, which shows New Zealand's market-implied cash rate falling by around 10 basis points over the coming year but remaining above the zero threshold. 

"On 11 November, the RBNZ MPS announced a generous lending programme for banks (the FLP), but markets interpreted that as lessening the need for additional stimulus via the OCR. Interest rates and the NZD surged in response. Then yesterday, the Finance Minister published a letter to the RBNZ proposing a change to its remit by incorporating house prices as a consideration for monetary policy. Markets pushed interest rates and the NZD even higher, effectively pricing out any further easing in this cycle," says Imre Speizer, head of NZ strategy at Westpac. "NZD/USD at 0.7100 is now plausible." 

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Speizer and the Westpac team have been tipping NZD/USD for a run at 0.70 over recent weeks and said on Wednesday the Kiwi is likely to make a second attempt at that threshold, but also that higher levels are plausible due to the market's newfound "hawkish" view of the Kiwi outlook.

"We no longer expect any additional policy easing from either the Reserve Bank of Australia (RBA) or the Reserve Bank of New Zealand (RBNZ).  Previously, we had expected the RBNZ to cut the official cash rate to ‑0.5%in April 2021.  Both AUD and NZD will benefit from the improving global economy and stronger commodity prices.  However, New Zealand exports are more exposed to the UK, the Eurozone and the US than Australia.  The lockdowns in these three economies will impact their demand for NZ products.  As a result, we expect gains in NZD will lag AUD," says Kim Mundy, a strategist at Commonwealth Bank of Australia.  

Source: Westpac. September 01, 2020 Overnight Index Swap (OIS) expectations for G10 rates. RBNZ shown in purple. 

Previously the RBNZ had been expected by financial markets to cut its cash rate -50 basis points, leaving it at -0.25% in April 2021, although the bank itself had warned investors of even steeper cuts than that. However, November's policy update proved to be a gamechanger that saw Orr and colleagues lift their "unconstrained OCR forecast" for the year ahead while announcing a new 'Funding for Lending' programme, which is now set to provide cheap cash to commercial banks over the coming months.

This month's change to OCR forecasts was followed on Tuesday by a government request that RBNZ officials take into account when setting monetary policy recent surging house prices and the threat they could pose to the economic recovery by keeping first time buyers off the property ladder. The RBNZ noted that it already does take those into account while pointing out that housing is a matter for other parts of officialdom, but that didn't stop the Kiwi Dollar from extending November's rally. 

"The market assumption is simply that if house prices are a formal part of the central bank’s policy equation, there is no room for policy rates to move into negative territory, as market pricing has been anticipating," says Shaun Osborne, chief FX strategist at Scotiabank. "It may be premature to rule out the notion of negative rates in NZ entirely at this point; the evolution of the global economy, rather than domestic housing, may be the ultimate arbiter of whether the benchmark rate pushes below zero."

New Zealand's Dollar is a commodity-backed currency that has a significant exposure to a Chinese economy which is thought to be enjoying a best-in-class economic recovery, although it's also been bolstered by a superier domestic coronavirus containment effort that's enabled most of the economy to reopen. Meanwhile, European as well as North American economies and currencies have all had to contend this month with further waves of infections and the resulting containment measures.

The net effect of thisis a market that continues to look for outperformance by antipodean commodity currencies against their major rivals.

Above: NZD/USD at weekly intervals with Fibonacci retracements of January 2018 downtrend, 200-week average in black.