New Zealand Dollar May Strengthen Next Week as RBNZ Comes into Focus say ANZ

-NZD falls broadly against G10's as bond yields head lower.

-Technical analysts eye firm support for NZD/USD at 0.70.

-Strategists flag potential for Kiwi rebound next week. 

© Naru Edom, Adobe Stock

The New Zealand Dollar fell broadly on Friday as risk currencies weakened and the US Dollar advanced on its developed world rivals although, according to strategists at Australia and New Zealand Banking Group, the Kiwi currency could be due a rebound once in the coming days.

New Zealand's currency was the worst performer against the US Dollar in April, dropping close to 3% over the course of the month, and appeared to be vying to retain this crown during the first week of May. The NZD/USD rate has dropped close to 1% during the last week, which has pushed it to a 0.96% loss for the 2018 year-to-date.

However, next week brings the latest inflation expectations survey and interest rate decision from the Reserve Bank of New Zealand, which may extend a lifeline to the embattled currency.

"Developments since the last meeting have been positive for the inflation outlook and the RBNZ is likely to acknowledge them. But uncertainties remain, and the Bank will likely maintain a cautious approach. There is a risk, however, that the OCR path may be nudged higher and this could provide a catalyst for some short-term NZD strength," says Giulia Lavinia Specchia, an FX strategist at ANZ Research.

The RBNZ releases its latest inflation survey on Tuesday at 04:30 am London time while the central bank's interest rate decision and accompanying statement is due to hit the market at 10:00 pm Wednesday.

Economists are unanimous in expecting the RBNZ to hold its interest rate at the current record low of 1.75% although the event will still garner attention because it is the first policy decision with new governor Adriann Orr at the helm and the statement could contain hints about when rates will eventually rise and how high the RBNZ sees them going.

Specchia and the ANZ team have changed the stop loss to 1.0650 on their AUD/NZD trade to lock in some of their profits, which might be wiped out if the RBNZ triggers a rally in Kiwi exchange rates. They are not alone in thinking the Kiwi currency may soon be due some respite from the relentless pressure it's seen during recent weeks.

"NZD/USD remains under downward pressure, thanks to the resurgent US dollar. Having shed 2.5c during the past two weeks, it will soon need a rest, but 0.7000 is possible this week," writes Imre Speizer, an FX strategist with Westpac. "Longer term, we are looking for a decline towards 0.6800 by year end, based on the USD responding to the Fed-generated rise in US yields."

Above: NZD/USD rate shown at daily intervals.

The NZD/USD rate was quoted 0.40% lower at 0.7011 during the noon session Friday while the Pound-to-New-Zealand-Dollar rate was 0.06% higher at 1.9288.

Above: Pound-to-New-Zealand-Dollar rate shown at hourly intervals.

Shifting interest rate dynamics in global bond markets have been at the heart of the Kiwi Dollar's recent decline as the support from higher relative bond yields that was traditionally enjoyed by the currency has been increasingly undermined during the 2018 year so far.

US 10 year yields have risen steadily in 2018, from a low of 2.4% to nearly 3% Friday, due to an increase in the supply of American bonds and as markets continue to flirt with the idea that the Federal Reserve could look to increase the pace at which it raises interest rates in the months ahead. Meanwhile, the Kiwi 10 year yield has fallen from 3.4% at the beginning of 2017 to just 2.8% in the first week of May.

These changes mean investors can now earn a higher return by selling Kiwi Dollars and buying the greenback in order to park their money in the American bond market. This is the opposite of how the so called "carry trade" used to work, where investors would sell US Dollars and other currencies in order to exploit the higher returns available in New Zealand.

"NZD remains soggy amid narrowing of NZ-UST yield differentials. Bearish momentum on daily chart remains intact but stochastics is entering oversold conditions and is showing tentative signs of turning from oversold conditions. Downside likely to be limited towards 0.6960 levels," says Saktiandi Supaat, and FX strategist at Maybank in Singapore.

The problem of falling yield support has been made worse for the Kiwi by the fact the RBNZ is universally expected to sit on its hands for another year, keeping its interest rate at a record low, while the Federal Reserve, Bank of England, Bank of Canada and European Central Bank all take steps to "normalise" their monetary policies.

This means the direction of travel is also unfavourable for the Kiwi currency, not just the present situation. It would take a strong hint from the RBNZ about the prospect of interest rates rising sooner than markets currently expect in order to shock the Kiwi currency back into life.

Such a hint could be delivered through tweaks to the RBNZ inflation forecasts next Wednesday or changes to its projections for interest rates over the longer term. And it's not just the ANZ research team that suspect something of that nature may happen fairly soon.

"Inflation temporarily dipped in Q1 this year as tertiary education became "free”, but we see upside ahead due to the following," says Annette Beacher, chief Asia Pacific macro strategist at TD Securities. "(1) Kiwibuild boosting construction costs (labour and materials) (2) a lower TWI boosting tradable inflation; (3) the acceleration in the minimum wage filters through to wage pressures more broadly; as (4) the planned decline in immigration scales back the supply of labour (skilled and unskilled)."

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