- NZD benefits from sweeping forecast upgrades at CBA
- NZD/USD holds 0.70, GBP/NZD at 1.9150 by year-end
- Seen making further gains VS USD, GBP through 2022
- Amid RBNZ interest rate rises, anticipated USD decline
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New Zealand’s Dollar has been a middle of the road performer throughout much of 2021 but sweeping upgrades to forecasts from Commonwealth Bank of Australia (CBA) suggest the Kiwi unit could become an outperformer as the new year gets underway in 2022.
The New Zealand Dollar got the better of troubled European currencies like the Euro, Norwegian Krone and Swedish Krona ahead of the weekend while underperforming its Australian counterpart and a bunch of others ahead of the weekend.
Friday’s mixed performance from the New Zealand Dollar was in line with its position in the major currency rankings for the year overall, a period for which it retained losses against a range of currencies including the Pound, U.S. Dollar and Canadian Dollar.
But thanks to an anticipated cycle of interest rate rises from the Reserve Bank of New Zealand (RBNZ) and an envisaged retreat by the U.S. Dollar, the year ahead could prove to be something of a game changer for the Kiwi Dollar if the latest forecasts from CBA are borne out.
“Given the outlook for RBNZ rate hikes we no longer forecast further NZD downside,” says Joseph Capurso, head of international economics at Commonwealth Bank of Australia.
Above: Kiwi Dollar Vs G10 currencies in 2021. Source: Pound Sterling Live.
- GBP/NZD reference rates at publication:
- High street bank rates (indicative band): 1.8521-1.8656
- Payment specialist rates (indicative band): 1.9020-1.9097
- Find out about specialist rates, here
- Or, set up an exchange rate alert, here
While the New Zealand Dollar still carried losses against some currencies for the year on Friday these statistics overlook the Kiwi’s performance in the three months to the middle of November, a performance that has seen it steadily turning tables on all of its major counterparts.
“We have materially increased our near term NZD/USD forecasts. We anticipate RBNZ rate hike expectations will offer NZD/USD support into year‑end, despite our forecast for further modest USD strength,” Capuros and colleagues wrote in a Friday update of CBA’s forecasts.
New Zealand’s Dollar rose to varying degrees against all major currencies between July and November after it became increasingly clear the Reserve Bank of New Zealand was on the verge of lifting its interest rate for the first time since April 2014.
The RBNZ had cut its official cash rate from 3.5% in April 2015 to 1% by March 2020 at which point the benchmark for national borrowing costs was reduced to a new record low of 0.25% in response to the coronavirus crisis, where it remained until October this year.
“The outlook for RBNZ rate hikes has increased substantially since early July. The significant increase in rate hike expectations has been driven by a steady stream of upside economic data surprises and an increasingly hawkish RBNZ,” says CBA’s Capurso.
Statistics New Zealand figures revealed with increasing clarity throughout the summer months that the Kiwi economy was undergoing a robust rebound from the collapse brought on by last year’s efforts at containing the coronavirus.
This rebound and other factors have lifted Kiwi inflation rates above the midpoint of the RBNZ’s 1% to 3% target band and led the bank to worry that price growth would continue at above target rates in the coming years if 2020’s interest rate cuts are not withdrawn.
“Our ASB colleagues expect 25bp rate hikes in both November 2021 and February 2022 before hitting a peak of 2% by the end of 2022. In contrast, markets are pricing a peak of around 2.5% by November 2022,” Capurso and colleagues said Friday.
RBNZ communications and the subsequent 25 basis point increase in the cash rate to 0.25% in October have led financial markets to fully price-in an eventual climb by the official benchmark to more than 2% by the end of 2022, enabling the Kiwi Dollar to outperform rivals over recent months.
The CBA team says the recent uplift in interest rates and expectations of more to come should help to keep NZD/USD afloat near 0.70 as year-end approaches, reflecting an upgrade from the bank’s earlier forecast for a year-end finish around 0.68.
Above: NZD/USD shown at daily intervals.
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Such a resilient performance from NZD/USD would likely prove supportive of the Kiwi against many other currencies given that this exchange rate is a key determinant of all other Kiwi exchange rates, although it’s an envisaged retreat by the U.S. Dollar that is expected to lift NZD/USD back to 0.75 by the end of 2022.
“Our outlook for a weaker USD as the global economy recovers is the driving force behind our stronger NZD forecasts in 2022. A stronger global economy is supportive for commodity currencies such as NZD. NZD undervaluation can also support a pickup in NZD spot over 2022,” Capurso and colleagues said.
CBA’s NZD/USD forecasts have been upgraded for each quarter of 2022 and this is bearish news for the Pound-to-New Zealand Dollar rate, given that the bank expects less appreciation by Sterling against the U.S. Dollar.
The Pound-to-New Zealand Dollar rate would fall from 1.9190 on Friday to 1.86 by the end of 2022 if CBA is right that the main Sterling exchange rate GBP/USD will rise to only around…
Read More: New Zealand Dollar Forecasts Upgraded Across the Board at CBA