Another Upgrade to New Zealand Dollar Exchange Rate Forecasts

Modified: Thursday, 03 June 2021 09:19 BST
Written by: Gary Howes

- ABN AMRO upgrade NZD forecasts
- Follows a similar move from JP Morgan
- GBP/NZD to fall to 1.81

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GBP/NZD reference rates at publication:
Spot: 1.9633
Bank transfers (indicative guide): 1.8945-1.9082
Money transfer specialist rates (indicative): 1.9455-1.9495
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"We upgrade our forecast for the New Zealand dollar," says Georgette Boele, Senior Currency Strategist with ABN AMRO, the Dutch headquartered international investment bank and financial services provider.

The call is just the latest made by financial institutions that have been pushed to shift their expectations for the Kiwi in the wake of a shift in stance at the Reserve Bank of New Zealand (RBNZ).

The RBNZ gave guidance at their May policy decision and Monetary Policy Statement that ultimately saw expectations for an interest rate rise move forward, with markets now expecting the first rate rise will come in 2022.

"The RBNZ also published its projections for the OCR. This showed that the OCR is likely to increase in the second half of 2022. This spurred rate hike expectations and supported the New Zealand dollar," says Boele in a research note out this week.

The rally higher in the New Zealand Dollar following the May RBNZ event is testament to just how important expectations on central bank policy are when it comes to currency movements and determining exchange rate forecasts at leading investment banks.

The RBNZ said at the May meeting it would once again start publishing estimations of how its basic interest rate (the OCR) might progress over coming years, having suspended such guidance during the Covid-19 crisis.

Above: RBNZ estimates for the OCR shows a potential 'lift off' in 2022.

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For much of 2020 the RBNZ committed its energies to exploring cutting interest rates to 0% and below, which made it one of the most 'dovish' central banks and helped trigger a sharp decline in NZ Dollar value.

But, with the New Zealand economy largely weathering the Covid-19 storm and global growth recovering, the RBNZ has flipped onto a rate hiking path and the New Zealand Dollar has benefited as a result.

RBNZ estimates show a total of 125bp in increases up to the end of 2023 but policy makers emphasised that any increases would be conditional on the economy evolving as expected.

"These projections were more hawkish than expected. It is now likely that the RBNZ will hike before the Fed (like the Bank of Canada) and well before the ECB," says Boele.

This expectation in turn implies higher New Zealand Dollar exchange rates says the analyst.

"We have adjusted our forecasts for the New Zealand dollar. We now expect an outperformance of the New Zealand dollar versus the US dollar and versus the euro," says Boele.

The NZD/USD exchange rate forecast for the end of June 2021 is raised to 0.72 with the year-end forecast going to 0.73. The current exchange rate is 0.7212.

The EUR/NZD forecast for the end of June falls to 1.65 and year-end goes to 1.58. The current exchange rate is 1.69.

The Pound-to-New Zealand Dollar exchange rate (GBP/NZD) forecast for mid-2021 is now at 1.87 while the end-2021 forecast is at 1.81. The rate at the time of publication is at 1.9625.

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Pound Sterling Live reported earlier this week that Wall Street investment bank JP Morgan raised their forecasts for the New Zealand Dollar by 4.0%, but the FX research team at Barclays told their clients they were expecting weakness in the currency in the short-term as some retracement on that post-RBNZ bounce was likely.

Bruce Kasman, Chief economist and head of global economic research at JPMorgan Chase & Co. said the RBNZ's guidance that a rate hike could come in 2022 "is a particularly abrupt turn, and with the notable exception of the BoE, other DM central banks are likely to remain committed to maintaining rates on hold next year, interpreting the current growth and inflation surge as transitory".

On the back of the forecast upgrades JP Morgan strategists informed clients they had "initiate NZD longs this week", underscoring their confidence in a higher NZ Dollar profile.

"As the list of hawkish central banks grows, dovish outliers remain: the ECB, and the BoJ especially, continue to trail the pack, tempering our enthusiasm for sustained EUR outperformance," says Paul Meggyesi, Head of FX Research at JP Morgan Securities.

If the RBNZ hikes in 2022 Meggyesi says it will be moving before most Developed Market central banks, reminiscent of the 'lonely' hiking cycle delivered in 2014 which sent NZD/USD to nearly 0.90.

But the short-term direction of the New Zealand Dollar is not necessarily one that aligns with the bullish sentiment of the JP Morgan upgrade, according to another analyst we follow.

Marek Raczko, an economist at Barclays, says he expects the New Zealand Dollar to be weaker in the near-term, saying the market might have overreacted to the policy decision.

"We expect the NZD to weaken and underperform after its sharp rally and outperformance last week," says Raczko in a weekly foreign exchange briefing.