Guest blog: The New Zealand Dollar in 2021 – Riding higher despite central bank moves

Category: Guest blogs

The Kiwi dollar has had a good 2020, helped by the local response to the Covid-19 pandemic that drew praise from around the world. It is therefore entering 2021 at decent levels and the crucial question remains as to whether the kiwi can finally start to fly and, if it can, will be allowed to do so?

We think it can, although significant risks remain from the policies of the Reserve Bank of New Zealand.

There has been no countryā€™s central bank who has communicated more the possibility of a move of monetary policy to include interest rates below zero, than the Reserve Bank of New Zealand. Sweden, Switzerland, Japan and the Eurozone are already there and while we doubt that the RBNZ will be the 5th central bank to press that particular button, the latent belief that it remains a policy option for the Monetary Policy Committee may keep NZD gains depressed, especially against its commodity currency counterparts such as the CAD and AUD.

Similarly, for an economy that is driven by exports, the recent upsurge in the value of the NZD will be painful, and that pain will only increase as trade-weighted NZD pushes onwards. Previously the RBNZ has been content with simply hinting that they believe the currency to be overly strong and the market has taken that as a note to pull back on the reins.

Given the stimulatory nature of global central banking, we would not be surprised if the RBNZ increased QE in a bid to keep the currency under control although they will need to be careful to not stoke concerns across the Tasman Sea with the Reserve Bank of Australia. Other measures such as controlling the level of NZ bond yields or outright purchases of competing currencies may also be used but would likely come as a last resort following numerous verbal warnings.

In summary, a good period for the NZD should continue but we will have to keep dialed in on what the central bank wants to be sure of the longer-term path.