NZD: Broad range trading likely to continue – RBC CM

Adam Cole, Research Analyst at RBC Capital Markets, suggests that NZD has traded a very broad range in 2017 so far, but in net terms, is a middle-of-the-pack performer amongst G10 currencies after January’s strong rally reversed sharply in February (not an unusual trading pattern).

Key Quotes

“NZD’s mixed performance continues to defy an unambiguously negative interest rate dynamic relative to the US, which we continue to rationalise through demand for yield in what, despite the slight back-up in rates since the US election, remains a very low global yield environment.”

“Domestic news flow in recent weeks has been moderately negative. The RBNZ kept rates unchanged at its February policy meeting, but it also retained a mild easing bias, with the Governor noting “… policy may need to adjust accordingly” and it revised its inflation forecasts lower at the policy-relevant horizon. Subsequent data releases have been on the soft side. Despite these developments, the forward curve in New Zealand has been dragged higher by higher US rate expectations and attaches a negligible probability to a near-term rate cut and on a one year horizon is fully priced for a 25bp hike. This is far ahead of the late-2019 hike implied by the RBNZ’s forecast.”

“Our economists remain of the view that the next move will be down as wage inflation remains weak and the resurgent NZD will continue to weigh on tradables inflation. As the housing market slows and takes headline growth with it, the RBNZ will be forced to cut. This development, counterbalanced by the recurring bid under NZD that results from its outright yield, will likely keep NZD within its recent range through Q2.”