NZD/USD: Kiwi to strengthen on back of less dovish RBNZ – MUFG

During January the New Zealand dollar weakened very marginally against the US dollar from 0.7198 to 0.7194. In the view of economists at MUFG Bank, the kiwi is set for advance in 2021.

Key quotes

“The New Zealand dollar advanced notably in the final two months of 2020, by 9.0%, which points to the potential for consolidation, or even correction lower, in the early part of this year. But currency support has prevailed to limit the downside given the global growth backdrop remains broadly stable.” 

“Some uncertainties persist over the course the COVID-19 virus will take but New Zealand has continued to be successful in sheltering itself from the rest of the world. The faster recovery in NZ due to successful management of coronavirus will inevitably leave investors more sensitive to inflation risks going forward. The Q4 annual CPI data was stronger than expected at 1.4% – the market expected a drop to 1.1%. The RBNZ also expected a drop meaning the prospect of further monetary easing is considerably less.”

“New Zealand GDP has already surpassed the pre-COVID peak so the spare capacity argument for aggressive monetary easing will dissipate as this year unfolds. The RBNZ will hold off on a communication change for as long as possible but investors are likely to increasingly speculate on a sooner shift in policy away from easing by the RBNZ which will provide the NZD with support.”