NatWest to Stay Long on New Zealand Dollars

Modified: Wednesday, 01 September 2021 08:59 BST
Written by: Gary Howes

- RBNZ offers fundamental support says NatWest
- See NZD forecasts vs. GBP, USD and EUR
- GBP/NZD now at three-month low

Above: File image of Christian Hawkesby. Image: Still from RBNZ.

GBP/NZD reference rates at publication:
Spot: 1.9480
Bank transfers (indicative guide): 1.8798-1.8935
Money transfer specialist rates (indicative): 1.9305-1.9380
More information on securing specialist rates, here
Set up an exchange rate alert, here

"Stay long NZD," says Paul Robson, Head of G10 FX Strategy at NatWest Markets.

This bet for further upside in the New Zealand Dollar currency comes amidst a period of outperformance that analysts say is the result of an improvement in both global investor sentiment and signs the Reserve Bank of New Zealand is intent on raising interest rates despite new Covid restrictions in the country.

The market now anticipates the RBNZ will raise interest rates at the next OCR review on October 06 by at least 25 basis points in response to ongoing strength in the economy that is at odds with record-low interest rates.

"We believe that the current macro-economic situation does justify the aggressive the rate hike stance, however acknowledge the risk premium attached to COVID-19," says Robson.

The only potential stumbling block to a NZ Dollar-supportive rate rise in 2021 remains a deterioration in the domestic Covid situation, which saw authorities on Monday extend Auckland's alert level 4 restrictions for another two weeks.

However the government remains confident it will get a handle on the current outbreak and on Wednesday said they expect a steady trend lower in cases from here.

The New Zealand Dollar is now the second-best performing major G10 currency of the past month and has only ceded ground to the risk-geared Norwegian Krone.

Above: NZD performance over the past month.

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The Pound-to-New Zealand Dollar exchange rate (GBP/NZD) looks set to record a tenth successive day of declines as a result of the Kiwi's push, having fallen from an August 19 high at 2.00 back to current levels around 1.95, a three-month low.

The New Zealand-to-U.S. Dollar exchange rate has risen from an August 20 low at 0.6805 back to current levels around 0.7050, the Euro-to-New Zealand Dollar exchange rate has moved from an August 20 high of 1.6642 to 1.6718 today.

Those August lows in the New Zealand Dollar were realised after the RBNZ unexpectedly opted to keep interest rates unchanged at record-low levels, defying market expectations for a rate rise.

The RBNZ said the delay was linked to the unexpected imposition of Covid lockdowns by the government and not linked to any shift in economic fundamentals.

But bring back those expectations for higher interest rates and NZ Dollar exchange rates duly respond.

Indeed, members of the RBNZ appear keen to ensure market expectations for higher rates don't dissipate to the extent that any hikes comes as a disruptive surprise to financing markets and exchange rates.

In this vein, recent communications from the RBNZ have suggested monetary authorities remain fully committed to higher rates, which has since offered support to the New Zealand Dollar.

"We put out a document that would have easily supported putting up the official cash rate last week... it was less about Covid stopping us doing it and it was more about the timing of communicating our policy move - was the 18th of August the right day as the country went into lockdown," said Assistant Governor of the RBNZ Christian Hawkesby.

"The above statement portrays the eagerness of the RBNZ to start hiking rates," says Robson.

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Fundamental support for a decision to raise rates are inflation levels above the RBNZ’s target range, labour shortages and elevated inflation expectations and housing prices.

NatWest also eye robust domestic demand as evidenced by July's jump in imports.

NatWest anticipate upside for the New Zealand Dollar against the Australian Dollar "given RBNZ continues to look relatively hawkish compared to the RBA".

"NZD/USD (currently 0.6955) continues to be dominated by broad based dollar movements which would need a strong catalyst to push it beyond 0.72 levels," says Robson.

"We expect this to hold a sideways trend till the Fed event risk has played out assuming the RBNZ stays hawkish in the background. Any further lockdowns, COVID-19 outbreaks or hawkish Fed action could push the currency pair lower," he adds.

The NZD/USD exchange rate is forecast by NatWest to end 2021 at 0.72 ahead of a move to 0.73 by the end of March 2022 and 0.75 by mid-2022.

NatWest forecast the GBP/NZD exchange rate to end 2021 at 1.98, ahead of a fall to 1.91 by March 2022 and 1.88 by mid-2022.

The EUR/NZD exchange rate forecast profile for this same timeframe looks like: 1.68, 1.64 and 1.64.