New Zealand Dollar Resurgent after Job Market Thumbs Nose at Coronavirus 

- NZD elbows USD & GBP aside to claims 1st place for 2021
- As job growth & unemployment fall put NZ on recovery path.
- NZD/USD seen supported at 0.71 & with scope to see 0.75.

Pine timber being exported from Wellington, New Zealand. Photo by James Anderson, World Resources Institute.

• GBP/NZD spot rate at time of publication: 1.8959
• Bank transfer rate (indicative guide): 1.8266-1.8399
• FX specialist providers (indicative guide): 1.8645-1.8796
• More information on FX specialist rates here

New Zealand's Dollar claimed the lead among major currencies for 2021 on Wednesday after final-quarter job data appeared to show the labour market thumbing its nose at the coronavirus, although analysts still expect the Kiwi currency to rise further in the weeks and months ahead. 

The New Zealand Dollar elbowed aside the U.S. greenback and Pound Sterling to become the best performing major currency of 2021 after Statistics New Zealand painted a picture of a job market in repair ahead of year-end. 

"The New Zealand dollar has been the best performing G10 currency overnight supported by the release of the stronger than expected employment report from New Zealand. It has resulted in the NZD/USD rate rising back above the 0.7200-level and AUD/NZD falling below 1.0550," says Lee Hardman, a currency analyst at MUFG. "The likelihood of negative rates being implemented has diminished. Overall, we continue to believe that the fundamental backdrop remains favourable for a stronger kiwi." 

Kiwi employment grew 0.6% last quarter, almost fully reversing the upwardly revised -0.7% contraction seen in the third-quarter while also surpassing consensus estimates that had looked for around a 0.1% increase.

Meanwhile, the unemployment rate fell from 5.3% to 4.9% and when economists had looked for it to rise to 5.6%.

Above: NZD/USD rate shown at 4-hour intervals alongside Pound-to-New Zealand Dollar rate (orange line). 

"The December 2020 quarter's rate of 4.9 percent is a return to rates observed over three years ago," Stats NZ says, before announcing that labour costs had risen by 0.4% on the quarter and 1.6% for the year to the end of December. 

The data does mask divergences between sectors however, with the all-important tourism industry shedding jobs even as a surging housing market enabled employment in the construction industry to grow 21k and by almost 10% to 278k. Growth in construction jobs offset tourism's declines overall.

"Given the resolution of measurement difficulties, we are inclined to take this at face value and conclude that conditions are unambiguously better than previously feared," says Liz Kendall, an economist at ANZ. "The RBNZ’s employment and inflation mandates are now looking more achievable, with the economy better placed to weather headwinds than previously feared. The RBNZ will want more assurance, with policy expansionary for a long while yet, but today’s data suggest the RBNZ can be patient."

Source: Statistics New Zealand.

For markets this means, if anything, that Reserve Bank of New Zealand (RBNZ) policymakers could find arguing for monetary easing grows more difficult in the months ahead. However, and on the other hand, this week's Reserve Bank of Australia (RBA) decision to increase its quantitative easing envelope does also show that a resurgent economy wouldn't necessarily prevent an antipodean central bank attempting to further grease the wheels of the job market. 

Nonetheless, the data was perceived positively by investors on Wednesday, enabling the Kiwi to slip back into the lead among major currencies for the fledgling 2021 year. New Zealand's Dollar was 0.2% higher against the greenback for 2021 and up 0.34% against the Pound, both being its nearest competitors for outperformance this year.

"NZD continues to consolidate sideways in the mid-high 0.71s, albeit with a hint of downside risk. A break below 0.7100 would signal a move to 0.7000. US dollar strength recently has been a major factor," says Imre Speizer, head of NZ strategy at Westpac. "We remain bullish NZD/USD, targeting 0.7500 by April (that was the peak area between 2016 and 2018). Key drivers are expected to be renewed USD weakness and NZ economic growth outperformance."

Above: New Zealand Dollar's 2021 performance against major currencies.

New Zealand's Dollar has been a top performer in recent months although most notably, since November last year when the RBNZ began to signal that investors should no longer take for granted the idea that it might implement a negative interest rate policy or even any further interest rate cuts at all this year.

“Medsafe’s decision is the culmination of a rigorous assessment process over many months to ensure the Pfizer/BioNTech vaccine is safe and effective to use here. It is informed by the most up to date medical and scientific data. We can have confidence in their decision," Prime Minister Jacinda Ardern says. "We can now begin preparations for the first stage in our vaccination roll-out."

As recently as November derivative market pricing implied that investors saw a -0.25% cash rate as all but certain to materialise in the first half of 2021. 

Above: NZD/USD rate shown at monthly intervals alongside Pound-to-New Zealand Dollar rate (orange line). 

But since then investors have shifted from wagering that subzero rates are a certainty, to betting that there's actually an emerging chance the RBNZ is forced to raise its interest rate as soon as the first quarter next year.

The RBNZ cash rate for February 23, 2022 implied by prices in the overnight-index-swap market was 0.26% on Wednesday and above the prevailing 0.25%, while the market-implied rate for July 14, was 0.33% according to Westpac data.

“NZ bond yields lifted sharply, with the 10‑year yield rising 11bp as more NZ‑based analysts unwound expectations for RBNZ rate cuts. Our ASB colleagues reaffirmed that the data highlight no more easing is required by the RBNZ. Fewer expectations for rate cuts can support NZD and weigh on AUD/NZD," says Kim Mundy, a strategist at Commonwealth Bank of Australia. "AUD was not impacted by RBA Governor Philip Lowe’s speech, despite Governor Lowe discussing exchange rates. He noted that the AUD was lower than it would have been otherwise because of the RBA’s bond‑purchase program. He also said it was premature to discuss withdrawing stimulus, especially in the context of other central bank’s accommodative monetary policy."