Image © Pound Sterling Live, Still Courtesy of RBNZ
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The New Zealand Dollar was closing in on an important technical support level against the U.S. Dollar on Tuesday having sustained losses against all other major currencies as risk appetite faltered and after the Reserve Bank of New Zealand (RBNZ) helped squash domestic bond yields.
The Kiwi was Tuesday’s underperformer after Governor Adrian Orr cemented the RBNZ’s position as the most ‘dovish’ central bank in the G10 realm, with New Zealand’s top policymaker reportedly having told markets the bank still has plenty of room for more quantitative easing.
“Orr said the RBNZ would rather worry about containing high inflation than risk deflation. He also said the RBNZ is monitoring house price inflation but said the RBNZ had alternative tools to address this if financial stability risks became a concern. We continue to expect the RBNZ to cut the cash rate by 75bp to ‑0.5% in April,” says Kim Mundy, a strategist at Commonwealth Bank of Australia.
Above: New Zealand Dollar performance against major currencies on Tuesday. Source: Pound Sterling Live.
Many analysts were already anticipating another increase in the quantitative easing programme target as soon as November but that didn’t stop New Zealand’s 10-year government bond yields from becoming the biggest fallers in the G10 sphere on Tuesday, likely weighing on the currency also.
The RBNZ has put investors on notice in recent months, warning that it’s preparing for a now-priced-in sub zero cash rate while also having threatened foreign asset purchases that would involve large sales of Kiwi Dollars as it seeks to support the domestic economic recovery and keep a lid on the currency.
“The main medium-term negative will be the dovish RBNZ, but we note that yield spreads have not been influential this year,” says Imre Speizer, head of NZ strategy at Westpac. “The key downside level to watch is 0.6550, a break of which would signal a longer bearish move. The multi-month outlook remains positive, with potential to rise towards 0.6800 – the top of a multi-month range.”
Above: NZD/USD at hourly intervals with NZ 10-year bond yield (black line, left axis), S&P 500 futures (blue line, left axis).
NZD/USD was trading barely more than 20 points above the 0.6550 support level flagged by Westpac on Tuesday but could be vulnerable to more protracted losses following a daily close below there. The Kiwi was worst performing major currency Tuesday and the second worst for the week as well as in the recent month, with only the Australian Dollar having sustained heavier losses.
“The New Zealand economy contracted by a historic 12.2%/yr in Q2 20. Since then however, activity has bounced back rapidly. New Zealand economic activity has caught economists by surprise,” Mundy says, in a recent research note. “The bottom line is that New Zealand’s recent economic resilience raises the risk that the RBNZ eases monetary policy by less than expected, or holds off from easing altogether.”
The RBNZ is not expected to cut its interest rate below zero until the second quarter of 2021 but the entire time that markets expect a move to negative interest rates, the bank could remain a burden for the New Zealand Dollar.
"NZD/USD remains in a four-month old ascending channel, with potential to test the 0.6700 area during the week ahead. Multi-month, we are happy to stick with our upbeat outlook, targeting 0.6800 by year end. That is mostly based on a weakening US dollar trend, as well as a positive outlook for risky asset classes," Westpac's Speizer says.
Above: Market expectations for RBNZ interest rate cuts greater than anywhere else in G10. Source: Westpac.
When not smothered by the RBNZ, the Kiwi has been taking its cues from U.S. stock markets that stalled in early September and which might be susceptible to unease about the likely outcome of the U.S. election in the weeks ahead.
Opposition candidate Joe Biden has seen his polling lead narrow with just two weeks to go until the November 03 ballot, potentially making the worst case scenario of a narrow victory for Biden that's contested in court more likely.
In addition to U.S. election uncertainty, a continued absence of financial support for households from Washington and a European lurch toward renewed coronavirus inspired lockdowns has also tempered risk appetite in recent days.
“With a lot of easing now priced in, house prices on the move and the general mood reasonably upbeat (some might even say there’s a whiff of 2007 in the air), it’s difficult to be bearish the NZD, particularly given NZ’s fiscal flexibility,” says David Croy, a strategist at ANZ. “But will folks be so upbeat at the end of summer without inbound tourism? And what of US politics?”
Above: NZD/USD at daily intervals with S&P 500 index futures (blue line, left axis).
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