The New Zealand Dollar: Low Hanging Fruit in 2020?
Matt Weller, CFA, CMT January 21, 2020 12:27 AM
Heading into the new year there are many positives which may not be fully priced in to the NZD...
This article is a complement to our full 2020 Market Outlook report - please download the full report for more insight into our views for major markets this year, including bold predictions from the research team! Note that all analysis and data was current as of mid-December.
2020 will likely be a game of two halves for the New Zealand dollar
Heading into the new year there are many positives which may not be fully priced in, yet if markets bid NZD too high, it will surely goad the Reserve Bank of New Zealand (RBNZ) into aggressive action.
As New Zealand’s economy is comparatively small for a developed country and relies heavily on exports, a strong currency cannot be tolerated. The RBNZ was the first to react when the Fed turned dovish last year, and later surprised markets with a 50bps cut to hammer home the point. This makes RBNZ hypersensitive to a global slowdown, and not at all ‘reserved’ in that respect. So, while there are bullish arguments for the NZD in the early stages of 2020, don’t expect RBNZ to idly stand by if the currency soars, especially with negative rates and QE on the table.
Bears are scrambling but bulls are yet to take things too far
Traders have been slow to react to a slew of better-than-expected data since October. PMIs are now expanding, business pessimism has likely troughed and milk prices (a major export) have rallied 20% year to date. The government recently announced a stimulus package which will support growth and, most importantly, the market expects RBNZ to hold rates in February which leaves plenty of time for NZD to rally over the interim.
With net-short exposure hitting a record high in October, bears are now unwinding positions but bulls remain on the sidelines. If data holds up in early 2020, bulls could rejoin the party.
How high can a flightless bird bounce?
Ultimately, there are bullish arguments for the kiwi in Q1, but the RBNZ could step in with at least a “jawbone” to try to talk the currency lower if it runs much further. Up 3.5% from its lows and around 0.7200, the closely watched TWI (Trade Weighted Index) is just below RBNZ’s forecast. If it were to extend its rally to 6%, it would be around 0.7400, which would be enough for RBNZ to step in with verbal intervention, at the very least. But history shows they’re just as comfortable with swift action.
StoneX Financial Ltd (trading as “City Index”) is an execution-only service provider. This material, whether or not it states any opinions, is for general information purposes only and it does not take into account your personal circumstances or objectives. This material has been prepared using the thoughts and opinions of the author and these may change. However, City Index does not plan to provide further updates to any material once published and it is not under any obligation to keep this material up to date. This material is short term in nature and may only relate to facts and circumstances existing at a specific time or day. Nothing in this material is (or should be considered to be) financial, investment, legal, tax or other advice and no reliance should be placed on it.
No opinion given in this material constitutes a recommendation by City Index or the author that any particular investment, security, transaction or investment strategy is suitable for any specific person. The material has not been prepared in accordance with legal requirements designed to promote the independence of investment research. Although City Index is not specifically prevented from dealing before providing this material, City Index does not seek to take advantage of the material prior to its dissemination. This material is not intended for distribution to, or use by, any person in any country or jurisdiction where such distribution or use would be contrary to local law or regulation.