Why the New Zealand Dollar Could Enjoy a Strong February

New Zealand

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If the New Zealand Dollar was amongst the biggest losers in January it stands it should be amongst the biggest winners in February.

This is according to research that shows some currencies have a remarkably predictable ability to completely flip January's performance, particularly if the moves appear extreme.

Adam Cole, Chief Currency Strategist at RBC Capital has studied the performance of currencies in the months of January and February, going right back to 2000.

"January is prone to overshooting in crowded consensus trades that subsequently unwind," he says in a research note.

"AUD, NZD and CAD show fairly consistent evidence of overshooting in January and subsequent reversal," he adds.

January reversal strategy RBC Capital

Above: "CAD, AUD and NZD all show consistent positive returns..." - RBC Capital. Source: RBC Capital Markets, Bloomberg.

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  • High street bank rates (indicative band): 1.9689-1.9832
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The New Zealand Dollar was the biggest loser in January 2020, falling against all its peers.

The Pound to New Zealand Dollar exchange rate rose 3.4%, the Euro to New Zealand Dollar rate rose 2.60% and the New Zealand to U.S. Dollar exchange rate fell 4.0%.

"It is hard to overstate just how badly NZD traded in January. After a 3.7% fall against USD, it was the worst performing currency within G10 and major EM. It is also difficult to explain why it traded so badly," says Cole.

Cole's research finds that for NZD/USD, almost all of the monthly move is "unexplained."

This is important in that it opens the door to seasonality as an explanation.

Indeed, Cole finds that some of the usual suspects - a combination of weaker equities and narrower rate spreads - accounted for just 0.5% of the 3.7% monthly fall.

"We argue ... that NZD (and AUD and CAD) has a strong tendency to overshoot (in both directions) in January and reverse in the remainder of Q1," says Cole.

If the findings are correct the New Zealand Dollar could be in for a February of gains against the likes of the Pound, Euro and U.S. Dollar.