New Zealand: Fundamental factors set to lift the kiwi – Westpac

The New Zealand dollar has faced headwinds in recent months, but this is expected to reverse in the near-term as strong economic fundamentals are leading to capacity pressures, and a more hawkish Reserve Bank of New Zealand (RBNZ) provides upside risk for the currency. Interest rate differentials and commodity prices are also expected to be supportive of the kiwi, economists at Westpac report.

RBNZ has taken the first steps to tighten monetary policy

“The New Zealand economy is outperforming most of its peers. And, reflecting this outperformance, the RBNZ is poised to lift the OCR in advance of other key central banks. As a result, interest rate differentials should provide a tailwind for the NZD, and we have upgraded our NZD forecast over coming quarters despite an initially lower starting point.”

“We expect that red hot commodity prices will continue to provide support to the NZD. New Zealand’s overall commodity prices hit record highs in June. And while the price baton is now passing between dairy and meat export prices, we expect commodity prices to remain very high over the remainder of 2021 and into 2022.”

“The stronger outlook for the NZ economy has led us to upgrade our forecast for the NZD/AUD cross. Like the USD story, New Zealand is facing greater capacity pressures compared to Australia. Part of this has been our success in containing covid, which has supported a faster recovery in activity.” 

“The RBNZ is currently more hawkish than the RBA as it has already tightened some aspects of monetary policy, and is expected to increase interest rates in the next few reviews.”