Image © RBNZ / Pound Sterling Live
The messaging and the maths all point the same way: and that's in NZD's favour.
The New Zealand Dollar's run at the top of the major currency leaderboard can extend, as the Reserve Bank of New Zealand has ample room to keep raising interest rates and its officials keep signalling they intend to use it.
"NZD is outperforming all major currencies," says Elias Haddad, Global Head of Markets Strategy at Brown Brothers Harriman.
The latest leg of support came from RBNZ Chief Economist Paul Conway, who Haddad says reinforced the central bank's hawkish bias.
"Monetary policy may need to respond more firmly to re-anchor inflation expectations," Conway warned, saying the bank must curtail the risk that temporary inflation shocks become persistent.
Conway also flagged a change in how the economy processes price pressures, noting that "businesses pass on cost increases more readily now than in the past and are less likely to reduce prices when costs ease."
The comments extend a deliberate messaging campaign from Wellington that began with the RBNZ's first interest rate rise in more than three years last Wednesday and continued with Governor Breman's hawkish radio remarks the following morning.
Room to Run
The forward-looking case rests on where the cash rate sits relative to where it could go.
At 2.50%, the OCR is barely inside the RBNZ's estimated neutral range of 2.2% to 4.1%, meaning the bank can deliver substantial further tightening while still only normalising policy.
Above: GBP/NZD has endured a rapid fall, but near-term support zones lie just ahead.
Haddad says this room to return the OCR to more neutral levels is supportive of the New Zealand Dollar, with inflation still above target and economic activity expected to strengthen.
Markets are betting the bank uses that space.
"The swaps curve implies 100bps of tightening over the next twelve months, nearly twice as much as the RBNZ policy path projection published in May," says Haddad.
The Watch-Outs
The gap between market pricing and the RBNZ's own published projections is the rally's fuel, but also its vulnerability: any data that forces traders to trim those bets removes support the currency is now leaning on.
And as we reported last week, history warns that heavy rate hike pricing does not always translate into currency strength, particularly if tightening starts to squeeze growth.
For now, though, the momentum, the messaging and the maths all point the same way: and that's in NZD's favour.
