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  • Month-end flows are dominant in FX markets this Friday and NZD is an outperformer.
  • NZD may also be feeling tailwinds from bank calls earlier in the week for a less dovish RBNZ going forward.

NZD/USD has slipped back to trade just below the 0.7200 level in recent trade, having hit highs of the day above 0.7220 prior to the US cash open. A further deterioration in the market’s broader appetite for risk (US stocks have been tanking anyway) is likely to blame for the recent downside in risk-sensitive NZD, though the pair still trades higher by about 0.3% on the day and is up on the week despite the broadly stronger US dollar. Month-end flows seem to be distorting the price action on the final trading day of the week.

Driving the day

FX markets are somewhat mixed/choppy on Friday given that it is the final trading day of the month and the final opportunity for institutions to balance their books ahead of the beginning of February. In G10 FX, that has meant selling in JPY (the worst performer), as well as in AUD, CHF and USD. Indeed, FX safe havens are underperforming despite the broader market tone being much more risk-off (US and European stock markets have been hit pretty hard, anyway).

NZD is one of the outperformers alongside NOK and CAD. No specific news can be pinpointed as being specifically behind why the kiwi is an outperformer on Friday or, indeed, why the currency has performed well on the week (NZD/USD is the second-best performing of the G10/USD majors this week, up about 0.2% and only lagging GBP/USD).

Banks betting on less dovish RBNZ going forward

However, as a reminder, a number of antipodean banks have been arriving at the conclusion that the RBNZ will not ease monetary policy any further in 2021; ANZ commented earlier in the week that “market confidence that the RBNZ is at, or close to, the trough in the monetary policy cycle remains a key driver of the NZD and dips are a buying opportunity”.

Meanwhile, Capital Economics went a step further to call for the RBNZ to hike as soon as 2022. They give three reasons as to why they do not expect any more stimulus from the RBNZ;

1) “The recovery in output occurred much faster than we had anticipated as GDP returned to pre-virus levels in Q3. And while the RBNZ is forecasting a renewed decline in output in the first half of this year, recent data suggest GDP has continued rising.”

2) “Most measures of underlying inflation surged in Q4. All of them are now close the RBNZ’s target mid-point.”

3) “Third, the housing market in New Zealand is running red hot. House prices are up nearly 20% from a year ago and show little sign of coming back down to earth. The surge in house prices prompted the Minister of Finance to write to RBNZ Governor Adrian Orr suggesting that house prices be added to the Bank’s monetary policy mandate. While the Bank rebuked that suggestion, we doubt Orr would be keen to exacerbate these political tensions by cutting interest rates further.”

CapEco’s forecast of a rapid recovery in output means that “we expect the unemployment rate to decline to around 4.5% by the end of 2022, consistent with employment being above its maximum sustainable level”. “Taken together with our forecast that underlying inflation will remain close to the Bank’s target mid-point”, they continue, “we think the Bank will turn its focus to policy tightening before long.”

CapEco suspects the bank will end QE purchases around the middle of this year and have penciled in three rate hike to 1.0% by the middle of 2023, making the RBNZ the first central bank in the developed world to lift rates following the Covid-19 outbreak.