Don't Write off New Zealand Dollar Yet: ING, ABN AMRO

Above: File image of RBNZ Governor Adrian Orr. © Pound Sterling, Still Courtesy of Financial Services Council NZ

According to analysts, the New Zealand Dollar is still set to be one of 2024's outperformers in the wake of the currency's selloff after the Reserve Bank of New Zealand's February rate decision and guidance update.

The New Zealand Dollar fell against its G10 peers after the RBNZ kept the official interest rate (the OCR) at 5.50%, disappointing some market segments that believed another rate hike was possible.

If anything, the RBNZ leant against expecting another rate hike, prompting a reappraisal of New Zealand interest rate expectations with a firming in bets for a September rate cut.

"The statement was less hawkish than expected in the sense that another rate hike is now less likely. This resulted in a lower New Zealand dollar," says Francesco Pesole, FX Strategist at ING Bank.

But Pesole says in a post-RBNZ note, "don't buy into NZD and AUD weakness," while his peers at ABN AMRO reckon the New Zealand dollar "is still set to outperform" this year.

The New Zealand Dollar fell after the RBNZ nudged lower its own projections for the OCR to 5.60% from the 5.69% set out in the November forecast, which lowers the implied probability of another hike to around 40%.

Meanwhile, the statement from the central bank showed a softening in the language around the prospect of more tightening, prompting markets to position for the first rate cut in September.

Pricing shows that 50 basis points of cuts have been added to this year.

Above: The RBNZ's inflation projections are slightly lower near-term, but medium-term are unchanged.

Following developments, the Pound to New Zealand Dollar exchange rate rose a per cent to 2.0752, with follow-through gains on Thursday taking the pair to 2.0780.

The New Zealand Dollar to U.S. Dollar exchange rate fell 1.17% to 0.6098, with Thursday's losses extending to 0.6091. The Euro to NZ Dollar rate rose 1.13% and is a further 0.25% higher at 1.79 on Thursday.

Analysts at ING Bank say that this RBNZ outcome was not the "dovish hit" that this NZD sell-off might imply.

Instead, strategists reckon the market unwound some of the recent growth in net-long positioning on NZD, which suggests more of a positioning clear-out than a fundamental reason to chase the currency lower.

"We think that the central bank could wait even longer to start easing. It all depends on the inflation outlook," says Georgette Boele, Senior FX Strategist at ABN AMRO.

Above: New Zealand's core inflation measures are too high to entertain interest rate cuts before September.

"The central bank is close to the end of the tightening cycle, but another 25bp rate hike by the RNBZ is still possible if inflation fails to decline as quickly as expected," she adds.

Such developments should ensure the NZ Dollar is protected from an excessive build-up in expectations for interest rate cuts, particularly against European currencies and the U.S. Dollar.

"We expect a later start of the easing cycle and less rate cuts in 2024 in New Zealand compared to the Fed and the ECB. This should support the New Zealand dollar versus the US dollar and the euro. This is reflected in our NZD forecasts," says Boele.

Track GBP and NZD with your own custom rate alerts. Set Up Here

ING Bank's FX strategy team says its view in the medium term for New Zealand and NZD is unchanged as the guidance and new forecasts from the RBNZ were in line with what was expected.

"NZD is due to benefit from an attractive carry for longer thanks to a more problematic disinflation path," says Pesole.

ING notes although the RBNZ's latest inflation forecast was revised lower to align it with recent figures, it is unchanged when it comes to the medium term.

New Zealand's CPI inflation currently stands at 4.7% y/y, "so it needs to come down significantly further," explains Bole. Headline CPI is still seen at 2.5% in 4Q24, and non-tradeable CPI projections were also unchanged at 3.4% for the end of this year.

"A sustained decline in capacity pressures in the New Zealand economy is required to ensure that headline inflation returns to the 1 to 3 per cent target. The OCR needs to remain at a restrictive level for a sustained period of time," says Boele.