New Zealand Dollar Puts in Strong Gains

  • AUD helps NZD higher
  • As both show little sensitivity to Russia tensions
  • But RBNZ risks loom next week

NZ Dollar

Image © Adobe Stock

Strong gains by the antipodean currencies are a feature of currency markets in the final session of the week, coming despite investor anxiety linked to developments regarding the Ukraine-Russia crisis.

The New Zealand Dollar is vying with its Australian cousin for the top spot in the performance rankings of the past week.

"Why then was NZD the top-performing currency?" queries Marshall Gittler, Head of Investment Research at BDSwiss Holding Ltd. "It’s kind of a mystery to me, but it’s clear that for some reason AUD/NZD is tracking the Ukraine risk."

NZ Dollar is the top performer

Above: NZD vies with the AUD for the week's best performer status.

The S&P 500 is looking at a second consecutive weekly loss, providing an instructive hint as to how broader global investor sentiment is faring amidst Russian anxieties.

The New Zealand Dollar's strong positive correlation with risk would therefore imply it too should be lower.

But it is not, and its outperformance could well be linked to that of its Australian cousin; often the two trade in lockstep given their geographical and cultural similarities.

Furthermore, both New Zealand and Australia are often viewed as commodity currencies given the importance of commodity exports for foreign exchange earnings.

We reported this week of analyst findings that any Western sanctions on Russia could materially impact the kind of Russian commodity exports that Australia shares.

In effect, where Russia loses Australia stands to gain.

"More important for the AUD and the Australian rates market at the moment are Russian-US tensions over Ukraine. If Russia were to invade Ukraine, G7 sanctions on Russian exports would soon follow," says Valentin Marinov, Head of G10 FX Strategy at Crédit Agricole.

  • GBP/NZD reference rates at publication:
    Spot: 2.0274
  • High street bank rates (indicative band): 1.9564-1.9706
  • Payment specialist rates (indicative band): 2.0099-2.0173
  • Find out about specialist rates, here
  • Set up an exchange rate alert, here

Marinov says such sanctions would have a negative impact on the supply of several commodities in global markets as Russia is the world’s biggest exporter of natural gas, and the second-largest exporter of oil.

Australia "would see a large and positive terms of trade shock from western-led sanctions against Russian exports," he adds.

Granted, New Zealand is largely an agrarian exporter and therefore has a different export basket to Australia, but the key point is the New Zealand Dollar can move in tandem with the Australian Dollar.

This appears to be the case at the moment with both currencies shaking off their high beta status and moving higher.

Looking ahead, the Reserve Bank of New Zealand's February policy meeting falls on Wednesday.

Markets are anticipating another interest rate hike, but the overall guidance offered by the RBNZ could determine whether the currency trades on idiosyncratic drivers next week.

"We maintain a bearish bias on the NZD, given room for the RBNZ to disappoint relative to market pricing, which seems overdone," says Daragh Maher, Head of FX Strategy, U.S., at HSBC.


Above: File image of RBNZ Governor Adrian Orr.

Maher says markets have priced in approximately 30bp of tightening at the upcoming meeting on 23 February, and approximately 194bp of rate hikes in 2022.

This would bring the OCR to 1.03% by the first quarter of 2022 and above the RBNZ’s latest projections for the terminal rate of 2.6% by November.

But the RBNZ's own projections put the cash rate at 0.9% in the first quarter 2022 and at 2.6% by the fourth quarter of 2023.

This suggests either the RBNZ has to catch up with the market, or the market will be disappointed.

"Given headline CPI has only surprised modestly to the upside at 5.9% y-o-y for Q4 2021 versus 5.7% y-o-y projected by the RBNZ, there seems to be greater scope for the bank to disappoint market expectations than match market pricing," says Maher.

"As such, we think the risks for NZD-USD are tilted to the downside and look to express NZD bearishness through a higher AUD-NZD," he adds.