New Zealand Dollar Faces Near-term Headwinds says ANZ in Latest Forecast Update

- NZ covid elimination strategy to weigh on economy
- "RBNZ is starting to stand out from the pack"
- "undoubtedly dovish for the NZD"
- Update forecasts for NZD vs. USD, GBP and EUR

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Foreign exchange analysts at New Zealand and Australia lender ANZ Bank have updated their forecasts for the New Zealand Dollar, saying the currency faces near-term headwinds owing to the government's aggressive strategy on eliminating covid-19 and a central bank that is more 'dovish' than its peers.

In a monthly foreign exchange update, ANZ do however say downside in the currency will be limited over a multi-month timeframe because global conditions - ultimately juiced by generous central banks - will prove supportive.

"Global liquidity is expected to remain a favourable medium term tailwind for risk sentiment, but with the RBNZ edging towards negative rates, that will cap NZD gains," says Rahul Khare, FX Analyst at ANZ.

Domestic headwinds are blowing however, with the New Zealand government's aggressive stance on covid-19 having flipped from being a supportive factor back in March-April to being a negative.

"With the government still pursuing a virus elimination strategy, that poses fresh downside risks to the near-term growth outlook. The longer term impacts are less significant, with low migration and the collapse of international tourism already a headwind," says Khare.

Finance Minister Grant Robertson on Tuesday said the Treasury estimates the two weeks of restrictions to contain the resurgence of Covid-19 caused a $1BN hit to the economy with each week costing $500 million.

New Zealand's Prime Minster Jacinda Ardern on Monday announced the latest lockdown would be extended from Wednesday to Sunday, and the risk of a further extension will only pile the pressure on the economy.

The strict lockdown will knock New Zealand's economic growth lower, exactly at the same time the majority of the developed world continues to grow as governments elsewhere pursue a policy of managing covid-19, believing it is a disease that is here to stay.

This creates the potential for economic divergence that could weigh on the NZ Dollar, particularly if the Aukland lockdown is extended once more, or it is lifted to only be reimposed at a later date.

Economic uncertainty meanwhile leaves the Reserve Bank of New Zealand (RBNZ) needing to offer substantial support via quantitative easing and lower interest rates.

"On a policy front, the RBNZ is starting to stand out from the pack, increasing its Large Scale Asset Purchase program and further guiding the market towards a negative OCR," says Khare. "The result of this is undoubtedly dovish for the NZD as yields are expected to compress, taking New Zealand’s rate structure from amongst the highest in the G10 to the lowest in 2021."

Expectations have grown over recent weeks that the RBNZ will indeed cut interest rates into negative territory early on in 2021, a move that will deprive the NZ Dollar of the interest rate support the RBNZ has for so long provided.

"In the near-term, uncertainties over the global path of growth may further dampen sentiment. This leaves us relatively neutral the NZD against the USD, while it will likely underperform against high beta crosses such as the AUD and EUR where relative rate differentials have greater influence. On balance, to reflect the conflicting forces from a dovish RBNZ and a broadly supportive global environment, we have maintained our forecast path near current," says Khare.

The New Zealand-U.S. Dollar exchange rate is forecast at 0.65 by year-end, a profile that is expected to be maintained throughout 2021.

The Pound-to-New Zealand Dollar exchange rate is meanwhile forecast at 2.0100 by year-end, 2.0300 by the end of March 2021 and 2.0460 by the end of June 2021.

The Euro-to-New Zealand Dollar exchange rate is meanwhile forecast at 1.8615, 1.8461 and 1.8153 for the above timeframes.

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