New Zealand Dollar Squashes GBP/NZD after RBNZ Looks Beyond Pandemic

- NZD crushes GBP/NZD after RBNZ tips 2022 OCR lift off
- “Highly conditional” forecast flags possible 2022 rate rise
- RBNZ suggests cash rate may hit 1.75% before mid-2024

Above: RBNZ Governor Adrian Orr. File Image © Pound Sterling, Still Courtesy of RBNZ

• GBP/NZD reference rates at publication:
• Spot: 1.9390
• Bank transfers (indicative guide): 1.8711-1.8847
• Money transfer specialist rates (indicative): 1.8782-1.9250
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The New Zealand Dollar roared back into life on Wednesday, sending GBP/NZD into a tailspin as it topped the board among major currencies entering the mid-week session after the Reserve Bank of New Zealand surprised the market with a ‘hawkish’ monetary policy report.

New Zealand’s central bank shocked the market as well as the Kiwi Dollar when it not only validated investors’ recent hopes of an interest rate rise as soon as the middle of next year but also further indulged the bullish contingent within the market with higher-than-expected forecasts for the cash rate in subsequent years.

“This projection is conditional, in that it communicates the policy path required to meet our monetary policy objectives subject to the economic outlook and the assumed impacts of other monetary policy tools. Future changes in the economic outlook should be reflected in shifts in the OCR projection,” the Reserve Bank of New Zealand (RBNZ) emphasised in its quarterly report.

The RBNZ suggested through its latest quarterly forecasts that the cash rate could return to its pre-pandemic level of 1.75% by the middle of 2024, which is far sooner than the currency market had anticipated, while also reiterating that the NZ$100bn allocation to the bank’s maiden quantitative easing programme is an upper “limit” and not a target.

Above: RBNZ projection for official cash rate, May 2021.

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The latter came at the same time as the bank revealed that it does not expect to reach the upper limit before June 2022 when it’s likely to end the programme in what is an uplifting development for New Zealand government bond yields as well as the Kiwi Dollar.

“The OCR track is in line with our view that the RBNZ will start to lift in August next year but the risks are now skewed towards earlier. We’ll be watching inflation expectations data particularly closely,” says Sharon Zollner, chief economist at ANZ.

NZD/USD surged back above the 0.73 handle for the first time since March in response to the update while the Pound-to-New Zealand Dollar rate was sent into a tailspin.

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Wednesday’s update from the RBNZ comes after New Zealand managed to all but eradicate the coronavirus last year and before many other countries, making way for an economic recovery that was already underway before this week when the Treasury announced as part of its latest budget that government will further support the economic recovery with additional spending in priority areas over the coming months.

“The NZD was again not mentioned, which is unsurprising since it has been only slightly below their forecast,” says Imre Speizer, head of NZ strategy at Westpac, who forecasts a 0.76 NZD/USD rate by year-end.

“We remain bullish NZD/USD, and wait for a break above 0.7300 to confirm the bullish trend has resumed,” Speizer had said earlier.

Above: NZD/USD shown at daily intervals alongside Pound-to-New Zealand Dollar rate.

New Zealand’s Dollar has recovered in recent weeks from late March declines that were inspired when GDP data missed expectations and the government announced surprise measures to curb runaway increases in house prices, dealing a crushing blow to the Kiwi at the time.

With major European economies taking steps to reopen this last week, after the U.S. economic recovery gained momentum at the opening of the year, the outlook for the global economy is improving tentatively albeit that parts of Asia are currently battling third waves of coronavirus infections.

“If market participants view the forecast upgrades as a hawkish shift, NZD could bounce higher and pull AUD/NZD below 1.07. ASB continues to expect the RBNZ to raise the cash rate in August 2022,” says Carol Kong, a strategist at Commonwealth Bank of Australia.

Above: NZD/USD shown at daily intervals alongside CNH/USD and USD/CNH.

Nonetheless the Renminbi’s thus-far successful attempt this week to overcome a stubborn 2021 resistance level against the Dollar is a bearish development for the U.S. currency, which the commodity-sensitive Kiwi is negatively correlated with, and is also supportive of a great many other currencies.

All told and combined this week’s developments in New Zealand and elsewhere are in turn a bearish development for the Pound-to-New Zealand Dollar rate, which often correlates well with the retreating U.S. Dollar and had recently been on a sustained tear higher that took it briefly above the 1.97 handle.

“The break below 6.40 in USDCNH could add to USD pressure to the benefit of EUR, GBP, CHF and the antipodes,” says Mazen Issa, a strategist at TD Securities.

“Taken in conjunction with a positive view on risk and correlations to boot, we add NZDUSD long to our TOTW,” Issa adds.