The New Zealand Dollar needs a new nickname.
The kiwi is a flightless bird, yet the NZD has been errm.. flying.
From the lows at 0.54 to 0.74 in just 11 months!
This week we have already seen another solid gain with the NZD pushing on another 180 pips against the dollar.
It’s banging on the door of those overhead resistance levels now
So, why is the kiwi so strong?
New Zealand has been one of the least affected countries by the pandemic.
Their ‘go hard and go early’ approach to lockdowns, and closing of external borders minimised the impact.
The economy still suffered the worst recession since 1987 (GDP growth fell 12.2% in Q2 2020), although progress since then has been encouraging – GDP growth bounced back in Q3
The unemployment rate is gradually trending lower too…
The economy trending back towards ‘normal’ is definitely a positive factor, but is this enough to justify the NZD optimism?
This is where we get a little more technical…
OK – let’s talk unconstrained OCR forecasts (OCR = Overnight Cash Rate)
This shows the most likely path of the overnight cash rate, the benchmark interest rate set by the central bank.
At the last meeting, the RBNZ lifted their OCR forecast, and clearly sees a far more positive policy path ahead.
The NZD swap market is now pricing in a full rate hike by July 2022, with a 30% chance of a hike as soon as November this year!
Further fuel was added yesterday when Finance Minister Grant Robertson announced that the Reserve Bank will need to assess the impact of monetary policy on house prices, and
“have regard to the impact of its actions on the Government’s policy of supporting more sustainable house prices, including by dampening investor demand for existing housing stock, which would improve affordability for first-home buyers.”
(House prices have risen by ~20% in the past year spurred on by low interest rates)
The increase in house prices has played a role in stimulating household spending (the wealth effect), and markets have taken this latest policy measure as another cue that tightening is coming sooner rather than later, with the 10Y bond yield rising to 1.9%.
If the data continues to support the case for a stronger economic recovery, and the Federal Reserve sticks to their guns on waiting for ‘substantial progress’ then there seems no reason why this trend should end.
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