NZD Is Struggling... Here’s Why
The only savior as of late for NZD has been an even weaker USD, which seems to be getting battered at the moment by improving risk appetite, bad data, dovish Fed expectations and continued grid lock in the US Congress over further fiscal stimulus.
Thus, NZDUSD is still not too far away from recent highs of around 0.6700; the cross is currently trading just under 0.6600.
But when you compare NZD’s performance to most of its other G10 counterparts, this picture is much more grim. Moreover, many analysts foresee that things are likely to get worse before they get better for the Kiwi.
1) The RBNZ wants to kill NZD, and markets are starting to believe it…
The RBNZ is on a mission to weaken NZD, as it seeks to boost exports amid a still very fragile global demand outlook, as the global economy struggles to recover from the Covid-19 pandemic.
Last week, the RBNZ surprised markets by expanding its QE programme to NZD 100bln from its previous size of NZD 60bln, a clearly dovish move.
Moreover, the bank reiterated its intention to take interest rates into negative territory in 2021 and doubled down on threats that it could start buying foreign assets (a way to weaken NZD directly, as to buy foreign assets, you need to sell NZD for another country’s currency), as well as lending directly to the NZ government (something called debt monetisation, typically a big no no in modern central banking given that in the past it has resulted in hyperinflation).
Moreover, the bank, keen to latch on to anything and everything to come across as dovishly as possible, noted that the recent Covid-19 outbreak in Auckland presents a grave economic threat.
Markets, who at first saw many of these dovish threats from the RBNZ as “just talks” back when the bank first started making them, are starting to increasingly believe that the bank will follow through.
Indeed, last night, widely followed (at least when it comes to RBNZ policy calls) local NZD bank ANZ joined throng of institutions calling for the RBNZ to take rates negative in 2021, weighing on NZD.
Now contrast RBNZ policy with that of the RBA, just across the water. The RBA is taking a very much “hands off” approach with AUD… rarely have we seen such divergence in the two bank’s policy’s in recent memory.
2) The recent Covid-19 presents a HUGE economic risk
Australia and New Zealand have contained the virus VERY well compared to most of their other G10 counterparts, in part thanks to their ambitions for “total eradication” of the virus in their respective countries. I.e. they took harsh measures to contain the virus that were not taken, say, in Europe or the US.
Indeed, NZ was virus free for over 100 days until only around a week ago. However, over the course of around the last 10 days, a small outbreak has begun in Auckland.
Around 12 new cases are currently being reported per day, a small number compared to say the UK, where over 1k cases are still being found per day. But the difference is that NZ’s ambition is for total eradication of the virus, so Auckland has been put into lockdown over it.
Put simply, this small number of cases is set to have a disproportionately high negative impact on the NZ economy, given the drastic response being taken to contain the virus. This is NZD negative.
NZD bulls will now have their fingers cross that this small outbreak, which has even resulted in the general election being postponed until October, can be quickly contained and lockdown restrictions can be lifted.
If the outbreak goes the same way as the one in Victoria, Australia (whose numbers were even super high compared to Europe, but still enough to trigger border closures and lockdowns), we could be in for even harsher lockdown measures in the country. This would weigh on NZD even more, as further country wide lockdown would be devasting for the economy, just like the initial round of lockdowns were.
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