1. Developments surrounding the global risk outlook.
As a high-beta currency, NZD has remained broadly well supported in times of risk-on and as the overall risk outlook and tolerance of the market has improved over recent months. With coronavirus vaccines programs now underway in many countries, we expect the months ahead to see a further gradual improvement in the overall risk outlook and global economic outlook.
2. The outlook for the RBNZ
Going into 2021, the outlook for the RBNZ were positive after the bank pushed back against the need for negative rates, as well as a string of positive economic data points showed the impact from the pandemic was less severe on the NZ economy than previously anticipated. However, optimism has diminished in recent sessions as new legislation by New Zealand's government to cool its housing market is expected to provide the RBNZ with more time before being forced to normalize policy. Consequently, that saw market expectations for the timing of future rate hikes being pushed back. However, at their May policy meeting the bank confirmed the market’s expectations that they will follow in the BOC’s footsteps to signal a move away from ultra-easy , by bringing forward rate hike expectations to as early as 2022. Recall that during their February policy meeting the uncertainty was high enough for the bank to provide no guidance on interest rates past March 2021, so for the bank to provide guidance for rates to rise next year and for further higher rates running into 2024 shows a very hawkish tilt as it was a material change in the bank’s optimism for the economy, both now and going forward. After the RBNZ’s shift we have upgraded our bias for the bank from to STRONG as we anticipate the shift to provide a favourable sentiment for the NZD in the short-term.
3. The country’s economic and health developments
With the new macroprudential policies put in place by the NZ government, it will be very important to keep close track of the virus situation in NZ as well as the incoming data. Due to the recent Macroprudential policies put in place by the NZ government our focus has turned to the incoming economic data as a guideline for whether the RBNZ will potentially move forward with tapering this year or not. Recent economic data has suggested that everything is still intact for the bank to follow in the BOC’s footsteps, which is of course exactly what the RBNZ did in their May policy meeting, which means the fundamental outlook for the NZD remains intact.
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