New Zealand Dollar Forecast: BNZ says "Consolidation Ahead"

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The New Zealand Dollar is forecast by analysts at Kiwi lender NAB to endure a period of consolidation following a multi-month tear higher.

A monthly strategy note from NAB - whose NZD research is conducted by the bank's New Zealand-based BNZ subsidiary - says the New Zealand Dollar is likely to remain well supported in 2021, given expectations for a global economic recovery.

However, some near-term weakness is likely given the scale and pace of the gains heading into 2021.

"After a strong run through to early January, the NZD is showing signs of fatigue, a period of consolidation we expect to endure through to the end of the quarter," says Jason Wong, Senior Markets Strategist at BNZ in Aukland.

This consolidation appears to be underway.

The New Zealand Dollar is currently seen trading lower against the U.S. Dollar, Euro and British Pound owing to a sharp decline in global equity markets, reaffirming the New Zealand currency's strong positive correlation with broader investor appetite.

Above: NZD weakness allows the Pound-to-New Zealand Dollar to snap a losing streak at the start of 2021.

Wong says the New Zealand Dollar's upward trend was supported by higher NZ commodity prices and higher risk appetite.

But stocks, commodities and commodity currencies such as the New Zealand and Australian Dollars are all now heading lower while the U.S. Dollar, Yen and Franc are leading the board amidst a market sell-off.

"The dollar has rallied by the most in a month overnight courtesy of a Federal Reserve that was dovish bit not dovish enough for most. Ongoing pressures in equity markets and the fears that a bubble may be popping or at least deflating in some places undermined risk appetite overnight, sending stocks lower, bonds higher and the USD higher too," says Jeremy Thomson-Cook, Chief Economist at Equals Money.

Intense speculative market participation by retail traders has fuelled sizeable bubbles in some sectors of the market.

The GameStop share price surge is the prime example, whereby the stock rocketed as retail investors piled in, spurred on by online forums.

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But in driving prices higher they also delivered a savage blow to institutional investors and hedge funds that were betting against the stock, forcing some into heavy losses. Indeed, the future of some hedge funds is now being called into question.

The New Zealand will likely struggle as long as the market correction extends, therefore how markets play out over coming days will be instructive as to how the Kiwi trades short-term.

"A period of consolidation after the 10% run in the most recent extension has been due," says Wong.

Looking beyond the soft start to 2021 predicted by BNZ, the backdrop remains constructive to Kiwi Dollar gains.

"A key question for 2021 is whether the global reflation trade can continue. We remain optimistic that it can, under the assumption that the rollout of vaccines will prove to be successful in beating COVID-19, boosting global economic growth," says Wong.

The vaccine-led recovery and "super accommodative" support by global central banks are seen to be key drivers of the appreciation theme for equities, commodities and the NZ Dollar.

"With this backdrop, it is easy to remain bullish commodity currencies like the NZD, given its leverage to the global economic cycle and this enduring theme on track to continue," says Wong.

The New Zealand Dollar-U.S. Dollar rate is forecast at 0.72 by the end of March 2021, 0.74 by the end of June 2021, 0.75 by the end of September and 0.76 by year-end.

Research courtesy of FXWatcher.com