Negative policy rate prospects should stem NZD strength but economists at HSBC don’t expect any large flow impact from a change in the rate sign. A divergent monetary policy outlook should see the NZD underperform the AUD further while the main reasons for the constructive view on AUD/USD are also mirrored in NZD/USD.
See: NZD/USD to extend the rise beyond 0.6620 – Westpac
Key quotes
“Negative rate prospects should stem NZD strength, although it is less likely to see any large flow impact from a change in the policy rate sign. In fact, we find that foreign holdings of New Zealand government debt have actually increased by NZD3 B since May 2020, despite the build-up of negative rate expectations and the yield curve dropping back below peers.”
“The AUD and NZD are both exposed to similar external forces as ‘risk-on’ commodity-exporting currencies, meaning it is frequently only the direction of domestic monetary policy that differentiates the two. In other words, a divergent monetary policy outlook should see the NZD underperform the AUD.”
“Essentially, aside from the monetary policy outlook, the main reasons for our constructive view on AUD/USD are mirrored in NZD/USD. For instance, the economic recovery is likely to be well supported by flexible fiscal policy, New Zealand’s current account is also in its best position for more than a decade and the outlook is also supported by buoyant commodity prices. So, we still expect NZD/USD to rise modestly into next year.”
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