If fears about the fate of the global economy force investors to transfer capital from high-yielding assets to low-yielding ones, then expectations of a rate hike fade into the background. Let us discuss the Forex outlook and make up a trading plan for NZDUSD, NZDJPY, and EURNZD
Monthly New Zealand dollar fundamental forecast
Which is stronger, monetary policy or global risk appetite? Which driver of Forex exchange rate formation is more significant? To answer this question, just look at the NZD. Although New Zealand is likely to be the first among the G10 currencies to raise rates, the NZD loses to the euro, yen and greenback amid a correction in US stock indices. Investors are seriously worried that the peak of global economic growth has already passed, and the Fed will soon want to take away the punch bowl just as the party gets going.
In the second decade of July, there was plenty of positive news for the Kiwi. For example, the decision of RBNZ to suspend NZ$100 billion QE was perceived by the markets as a signal to increase the cash rate already in 2021, while the release of strong inflation data increased the likelihood of two acts of monetary restriction in August and November. Indeed, thanks to an effective fight against COVID-19, New Zealand’s economy expanded by 1.6% QoQ in the first quarter. Inflation, in turn, jumped to 3.3% in the second, exceeding not only the forecasts of Bloomberg experts, but also the upper limit of the 1-3% range targeted by the central bank.
Dynamics of inflation and the RBNZ rate
The heated real estate market, the recovery of the labor market and rapidly growing inflation increase the risks of monetary policy tightening. According to experts interviewed by Bloomberg, the cash rate can grow to 2% by the beginning of 2023, but in the coming months it will not exceed 1.25%. If the rate basis is extremely low, as in the current conditions, even a slight increase can lead to serious consequences. So Adrian Orr and his colleagues will move very slowly to assess the impact of monetary restriction.
As for the upper limit of the cash rate, according to the RBNZ’s May statement, the neutral rate, which will not stop the economy and at the same time remove monetary stimulus, is 1.9%. This is significantly lower than in 2004 (5.4%).
Dynamics of the RBNZ rate
According to the latest FOMC forecasts, the first increase in the federal funds rate will take place in 2023. By this time, the Reserve Bank of New Zealand may complete its monetary policy normalization cycle, and the rate differential will be 175 bps. Theoretically, its expansion serves as a signal for the formation of long NZDUSD trades, however, the pair continues to fall. The deteriorating global risk appetite and the associated closing of positions by carry traders make bears discouraged. In such conditions, funding currencies are popular, so the decline of the “Kiwi” against the euro and the yen looks logical.
What’s next? If you consider yourself optimistic and believe that the global economic recovery will continue, buy NZDJPY if the pair rises above 76 and 76.7 and sell EURNZD below 1.702 and 1.6925. If you expect another recession, sell the NZD against the greenback, euro and yen.
Price chart of NZDUSD in real time mode
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