New Zealand Dollar Cements Best Performer Status on Hawkish RBNZ Message

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The New Zealand Dollar has lead its G10 rivals over the course of the past month, an outperformance that has been cemented by the Reserve Bank of New Zealand's decision to raise interest rates and signal more are coming.

A 25 basis points was delivered as expected, but it was the RBNZ's 'hawkish' tone regarding the need for further rate hikes that helped stimulate demand for the Kiwi.

The RBNZ has now delivered three successive rate hikes and the Monetary Policy Committee said in a statement the Official Cash Rate won't rest at 1.0%: "further removal of monetary policy stimulus is expected over time given the medium-term outlook for growth and employment, and the upside risks to inflation."

Jane Foley, Senior FX Strategist at Rabobank says the performance of the New Zealand Dollar suggests that the messages out of the RBNZ "went beyond what the market had been expecting".

"The NZD is the best performing G10 currency on a 1 day view. The move has cemented the kiwi’s position as the best performer amongst its peers over the course of the last month," says Foley.

Above: NZD outperformance over the past month. Source: Pound Sterling Live.

• GBP/NZD reference rates at publication:
  Spot: 1.9987
• High street bank rates (indicative band): 1.9287-1.9427
• Payment specialist rates (indicative band): 1.9807-1.9887
• Find out about specialist rates, here
• Set up an exchange rate alert, here

"The New Zealand central bank's raised OCR projections for 2024 and hints of +50bp moves going forward seemed to be the primary drivers for the excitement," says analyst Eric Bregar at The FX Beat.

The Pound to New Zealand Dollar exchange rate was lower by 0.90% on the day, trading at 1.9984 with the pair now lower 2.20% in January.

The move goes some way in overcoming the 3.50% gain registered by Sterling over its Kiwi counterpart in January.

The New Zealand Dollar-U.S. Dollar exchange rate is up 0.90% in February at 0.6800, the Euro-New Zealand Dollar exchange rate is down two-thirds of a percent in February at 1.6680.

Crucially, the RBNZ also said it would commence the gradual reduction of the Bank’s bond holdings which were made under its Large Scale Asset Purchase scheme (quantitative easing).

The RBNZ will sell assets at an annual pace of NZ$5BN from July, meaning the RBNZ not only leads on the rate hike cycle but also on the quantitative tightening cycle.

This should offer the New Zealand Dollar an undeniable source of support.

"The central bank has been marked out as one of the most hawkish G10 central banks for some months," says Foley.

Another bullish signal came with the hiking of inflation projections with annual CPI inflation now expected to peak at 6.6% in the first quarter of 2022, up on previous projections for 5.7%.

Critically, the RBNZ now believes "employment is now above its maximum sustainable level".

"We are forecasting a move higher towards NZD/USD0.71 on a 3 month view," says Foley.

A rise in NZD/USD would pressure the GBP/NZD lower if GBP/USD were to stay constant.