NZD/USD: RBNZ stance will act to limit NZD upside – MUFG

Analysts at MUFG Bank see the NZD/USD pair trading at 0.6300 at the third quarter, at 0.64 in the fourth and at 0.65 in the first quarter of 2021. They point out the Reserve Bank of New Zealand (RBNZ) displayed concern about the strength of the kiwi. 

Key Quotes:

“Like other currencies elsewhere, the New Zealand dollar rebounded further versus the US dollar as risk sentiment improved further helping restore optimism in the global growth outlook. Admittedly, the scale of recovery has surprised us and hence our forecasts will have to undergo some upward revisions.”

“There remains reason to be cautious over the extent of further gains from here – certainly over the near-term. Firstly, COVID continues to spread and the re-escalation in the US may well mean risk appetite is not as resilient as we have seen in recent months. Secondly, the RBNZ indicated a possible increased focus on NZD strength going forward that is likely to result in NZD underperforming in times when risk appetite is strong. The RBNZ expressed concern over the strength of NZD as it had “placed further pressure on export earnings”. In the record of the meeting the details of other policy options being explored to support the economy going forward could include foreign asset purchases. So the RBNZ were clear on essentially restarting FX intervention which would undoubtedly have a notable impact on slowing NZD appreciation.”

“The tolerance level of NZD strength also appears low. The RBNZ NZD TWI gained over 5% from the low in May but is in fact in a downtrend and is 10% weaker since 2017. The RBNZ stance will act to limit NZD upside from here.”