New Zealand Dollar Tipped to Outperform

- NZD a buy says RBC Capital
- NZD is best performing major currency of past week
- Further easing of lockdown announced in NZ


Above: File image of Prime Minister Ardern. Image © NATO, reproduced under CC licensing conditions, image cropped from original.

The New Zealand Dollar is forecast to outperform the Australian Dollar over coming days by strategists at a global investment bank, a view which if correct would suggest the potential for outperformance by the Kiwi against other peers such as the Dollar, Euro and Pound.

Adam Cole, Chief Currency Strategist at RBC Capital Markets has made a bet on AUD/NZD downside his 'trade of the week', in anticipation of New Zealand Dollar strength.

According to Cole, the New Zealand Dollar has absorbed a significant amount of negative news recently, setting a high bar for any news flow that might encourage the currency to decline.

"NZD has taken on board a lot of negative news recently, reflected in OIS forwards which drop steadily to break through zero in around 12 months," says Cole. "While RBNZ is clearly signalling that the option of negative rates remains open, short-term, the news flow is more likely to suggest that risk is diminishing."

Policy setters at the Reserve Bank of New Zealand (RBNZ) have during May toyed with the idea of cutting interest rates yet further, with Governor Adrian Orr saying cutting the OCR below zero cannot be ruled out.

Yet, markets are sensing that this could merely be 'hot air' as the Governor and his colleagues are in fact merely maintaining a line of communication designed to keep the yield on NZ government bonds low, and the currency suppressed.

Trend is lower for GBP against NZD

Above: The Pound is trending lower against the NZ Dollar in the short-term

Last week Orr let the NZ Dollar off the hook after suggesting cutting the Overnight Cash Rate to below zero remained some way off, "it’s got to be seen to be effective, efficient and operationally capable."

The New Zealand Dollar has since recovered ground against many of its peers, and now stands as the best performing major currency over the course of the past week. The Pound-to-New Zealand Dollar exchange rate is now 1.23% lower over this period of time at 1.99.

The Euro-to-New Zealand Dollar exchange rate is down 1.20% at 1.7750 while the New Zealand-U.S. Dollar exchange rate is 1.35% higher at 0.6169. The Australian Dollar has lost 0.37% to trade at 1.0720.

Driving a sense of bullishness behind the New Zealand Dollar is the country's exit from lockdown, that leaves it able to outperform many of its peers that are still cautiously considering a return to normal.

The country will remain at alert level 2 for another four weeks, when another downgrading of restrictions is expected to be allowed.

Prime Minister Jacinda Ardern and her cabinet will review the level's settings on Monday June 8 and make a decision on whether to move to level 1 no later than June 22.

Ardern said on Monday that it was Government's view the country should move as quickly and as safely as possible to level 1, without losing any gains.

NZD forecast

Ardern has meanwhile revealed government plans to allow gatherings of up to 100 from midday on Friday, May 29.

She says it took about two weeks before the effects of changes in restrictions were seen, and New Zealand had been able to avoid a second wave of infection.

"We can now be highly confident, more than three weeks after the shift to level 3, that there are no new cases attributable to the more relaxed restrictions which we had as we stepped down into level 3 and started moving beyond that," said Ardern.

Should the New Zealand economy start to outperform its peers in a material manner owing to the easing of lockdown restrictions, we could anticipate some NZ Dollar outperformance, and the near-term rally we have seen therefore could fledge into something more sustained.

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GBP/NZD forecast