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  • NZD/USD has risen from US session lows but has failed to retest session highs in the 0.7250s.
  • NZD underperformance is surprising given strong inflation and a hawkish move from the RBNZ.

NZD/USD put in a strong performance during Asia Pacific trade, rallying from around the 0.7220 area to marginally above the 0.7250 mark. However, by the time US participants arrived in the market, the pair had begun to slip and by the start of US trading hours, the pair had pretty much given away all of its gains for the day.

Renewed US dollar weakness, as the Dollar Index (DXY) slips below 90.50 and a number of other G10/USD pairs hurdle key levels has since given NZD/USD a boost; the pair is making its way back higher towards prior highs of the session and currently trades around 0.7240. Though the kiwi is higher by about 0.2% on the day versus the US dollar, it has put in a pretty tepid performance on the day versus the majority of its other G10 counterparts and sits close to the bottom of the G10 performance table.

Driving the day

NZD underperformance on Tuesday is somewhat surprising given central bank developments in New Zealand during Tuesday’s Asia Pacific session; the RBNZ surprised markets with an announcement that it would be tightening macro-prudential policy in an effort to suppress growing risks in the country’s housing market. The bank announced that it would be reinstating mortgage lending restrictions from 1 March and then they would be tightened even further after 1 May. The new restrictions mean that most buyers who intend to live in the house they are purchasing will need a 20% deposit, while those buying a house as an investment will need a 30% deposit.

The decision to announce the policy shift now, rather than wait for their next meeting on 23 February, signifies the growing alarm that must being felt by RBNZ policymakers over the overheating housing market; alongside the policy announcement, RBNZ Deputy Governor Geoff Bascand warned that “a growing number of highly indebted borrowers, especially investors, are now financially vulnerable to house price corrections and disruptions to their ability to service debt”. In other words, if an economic shock does hit New Zealand and trigger 1) a drop in house prices and 2) a drop in the ability of debtors to repay their mortgages, then financial stability in the country is at risk (such a scenario would see bank solvency come under serious threat, much like the 2008/9 sub-prime mortgage crisis in the USA).

The move is likely to take some of the heat out of the housing market over the coming months. But more importantly, the move should serve as further confirmation to investors that current RBNZ monetary policy (interest rates at 0.25% and a QE programme worth NZD 60B) is as dovish as the bank is going to go. After all, the bank knows what lowering interest rates even further would do to the housing market (it would heat it up even further).

Ultimately, a number of institutions and market commentators have been calling the bottom in RBNZ dovishness for some time now, given improvement’s in the country’s economic situation and rapid house price appreciation, so the news shouldn’t come as a massive shock. But the notion that “this is it” from the RBNZ and that, assuming the economic recovery continues as planned, the bank could be one of the first major G10 central banks to raise rates (markets think this could happen as early as 2022), should support NZD in the coming weeks and months.

Elsewhere, RBNZ Inflation Expectations for Q1 2021 came in at 1.89% QoQ, a steep rose from 1.59% in Q4 and back to pre-pandemic levels. Though the speed of the jump might be somewhat concerning to the RBNZ, inflation expectations are still below their five-year average and the RBNZ’s target of 2.0% inflation.

Looking ahead, Electronic Card Retail Sales data for January will be released at 21:45GMT on Wednesday and could trigger some NZD volatility, but NZD/USD is likely to remain more focused on USD dynamics and global risk appetite.