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Beware New Zealand Dollar Disappointment: Morgan Stanley

  • RBNZ might not hike as much as expected
  • Posing downside risks to NZD
  • See Morgan Stanley forecasts for USD/NZD
  • As well as GBP/NZD

RBNZ and Governor Orr

Above: File image of RBNZ Governor Orr. The RBNZ faces lofty rate hike expectations in 2022.

The market anticipates the Reserve Bank of New Zealand to lead the charge to higher interest rates in 2022, but they are likely to disappoint against the lofty expectations held by investors warns a Wall Street investment bank.

Morgan Stanley says the New Zealand Dollar is at risk of a repricing of RBNZ rate hike expectations to the downside, an eventuality that might be realised as the Omicron variant causes a shift in attitudes at the RBNZ.

Analyst David S. Adams says central banks are having to reconcile changing dynamics with regards to the pandemic: rising cases could be impacting demand amid self-isolation and varying degrees of lockdowns, but also supply.

Markets continue to pencil in a high probability that the RBNZ delivers "hawkish actions despite higher case numbers. So, if they surprise to the dovish side, there's more scope for currency weakness than if they deliver what's expected," says Adams in a research note put out by Morgan Stanley at the start of 2022.


  • GBP/NZD reference rates at publication:
    Spot: 2.0085
  • High street bank rates (indicative band): 1.9380-1.9520
  • Payment specialist rates (indicative band): 1.9900-1.9985
  • Find out about specialist rates, here
  • Set up an exchange rate alert, here

The note comes out at a crucial moment for central banks given four of the world's major central banks could raise rates again in January/February, including the RBNZ where a third hike in the cycle is expected.

"The BoC and RBNZ are considered among the most hawkish central banks in the G10," says Adams. "The fact that there is already a good amount (to varying degrees) priced in for these central banks to act suggests an elevated risk for volatility but also an asymmetric dovish bias."

A key theme driving currency markets in 2022 will be central bank normalisation; the process whereby central banks raise interest rates and reverse their pandemic-era quantitative easing programmes.

This raises the yield paid on government bonds and raises the cost of financing.

Those countries that take the lead would be anticipated to see their currencies advance relative to the laggards.

But disappointment against expectations could result in currency weakness: if the RBNZ's normalisation timeline is pushed back the New Zealand Dollar could face headwinds.

OIS markets - a gauge of how how investors are anticipating interest rate moves - show the Reserve RBNZ leads the pack with 156 basis points of hikes anticipated to be delivered.

As many as 140 basis points of hikes are expected to come out of the Bank of Canada in 2022 according to investment bank Credit Suisse, this contrasts hawkishly with the 86bp say they are anticipated from the Federal reserve, 104 points from the Bank of England and 104 from the RBA.

"The most clear case is with NZD, where a hike is fully priced for February. This is one of the reasons why we continue to maintain a bearish stance on NZD," says Adams. "There is arguably no G10 currency which has more asymmetric downside risk from central bank pricing than NZD."

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Morgan Stanley strategists hold a 'long' position on the Australian Dollar-New Zealand Dollar exchange rate in anticipation of RBNZ disappointment.

"The considerable amount of tightening already taken place raises the risk of inadvertent "overtightening" in 2022. The rise in the COVID-19 Omicron variant, likely keeping border restrictions in place for longer, raises the risk of permanent economic challenges to externally-focused sectors," says Morgan Stanley.

The investment bank forecasts the New Zealand Dollar-U.S. Dollar exchange rate to be at 0.70 by the end of the first quarter of 2022, 0.70 by the end of the second quarter, 0.72 by the end of the third quarter and 0.73 by year-end.

Their point forecasts for the Pound-Dollar rate at the above time points are: 1.34, 1.34, 1.36 and 1.38.

This allows for a cross Pound-New Zealand Dollar exchange rate forecast projection of: 1.91, 1.91, 1.89 and 1.89.