- NZD is a top performer in April
- Gains will however be unwelcome at RBNZ
- Expect RBNZ to be headwind to NZD appreciation
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The New Zealand Dollar maintains a bullish tone on foreign exchange markets in line with the broader recovery theme that has gripped global markets for six weeks now, the currency has now recorded an advance of 3.80% against the U.S. Dollar over the course of April.
Gains have been widespread, with a 3.8% advance being registered against the Euro and a 3.30% advance being recorded against the Pound.
For those with NZ-based international payment requirements, the question heading into May is whether the currency can maintain its momentum and offer up further appreciation?
The simple answer is yes, provided markets maintain the view that lockdowns will continue to be reversed and central banks will continue to underwrite the economy we see little reason to question the NZ Dollar's positive trend.
The New Zealand Dollar, like its Australian cousin, maintains a positive correlation with investor sentiment, rising when markets rise and falling when they sink. We are in the grip of a period of appreciation at present and until this is questioned by investors we would imagine the NZ Dollar remains an out-performer.
Above: Only the Australian Dollar has outperformed the Kiwi in April in the G10 sphere
However, the gains by the NZD will be watched by a nervous Reserve Bank of New Zealand (RBNZ) that would prefer their currency remains contained near current levels in order to shore up the economy's recovery, it could therefore be the RBNZ that proves to be the largest headwind to any significant bouts of appreciation.
RBNZ Governor Adrian Orr said mid-month that negative interest rates at the RBNZ are a possibility that he would not rule out, while direct financing to help support monetary conditions should also be pursued if required.
Above: RBNZ Orr tells MPs negative rates are not ruled out
The comments by Orr have lead some foreign exchange market commentators and analysts to suggest the RBNZ is likely to follow through with these options and slash rates into negative territory and buy government debt directly from the Treasury.
"Such a weak economic outlook will require a massive monetary and fiscal response," says Dominick Stephens, Chief Economist at Westpac in Auckland. "We expect the RBNZ will reduce the OCR to -0.5% in November 2020."
Foreign exchange market theory would suggest an outcome would erode the attractiveness of New Zealand as a destination for foreign capital seeking yield, which would in turn keep downside pressures on the NZ Dollar.
"New Zealand can count itself as one of the most successful countries in the world in managing to almost eliminate Covid-19 from within its border, at least for now. However, the economic cost of its strict shutdowns is set to be high. Consequently, not only has more fiscal spending been promised in the May budget, but the market is anticipating further monetary policy adjustments at the May 13 RBNZ meeting," says Jane Foley, a senior FX strategist at Rabobank. "As a consequence the NZD is vulnerable."
However, Francesco Pesole, FX Strategist at ING Bank N.V. says Orr's comments should not be necessarily considered a promise, rather the Governor could be engaging in deliberately opaque guidance designed to keep a lid on the value of the New Zealand Dollar.
In times of economic stress a country's currency can act as a shock absorber by falling, making that country's exports more attractive to international buyers. A weaker New Zealand Dollar would therefore help the country's economy recovery, while any surge in value would be viewed as unwelcome by the RBNZ.
"The Bank may not be comfortable with a recovery in the NZD just yet, as they recognise its role in keeping exports attractive in global markets, as the New Zealand economy tries to work its way out of the sharp downturn," says Pesole.
New Zealand appears to be ahead of the curve when it comes to exiting lockdown conditions, with Prime Minister Jacinda Ardern this week confirming restrictions would be eased as the virus appears to have been contained.
Above: Prime Minister Ardern addresses media as lockdown restrictions are eased
"Recent RBNZ policy has been all about responding to the Covid-19 outbreak. Certainly, the NZ lockdown will have hurt economic activity, but as of 28 April, the lockdown ended. New cases are very low and their sources well understood. This isn't to rule out a second wave, but for now, it does look as if the country has managed to deliver a way out of lockdown with minimum economic disruption, and a return to growth in 2Q now looks very likely," says Pesole.
Given that New Zealand's economy could now be well ahead of its rivals in recovering, one questions whether negative interest rates at the RBNZ are in fact required.
"So given that the macro outlook has clearly improved, the macroeconomic rationale for adopting either negative rates or direct monetisation looks extremely weak," says Pesole. "While it is true that the NZD has lost around 5% on a trade-weighted basis since the Covid-19 outbreak became public (late January), the RBNZ may be worrying about the faster than expected rebound in its currency."
ING expects the RBNZ to maintain an ambiguous tone going forward, as it keeps an eye on the value of the New Zealand Dollar which should counter some of the appreciation pressures provided by an improving global backdrop.
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