FX Spotlight | NZD: Still standing despite no hike | Article – HSBC VisionGo

• No rate hike and the national lockdown announcement did not dent the NZD…
• …mainly due to the more aggressive cash rate projections and the stabilisation in the broader risk sentiment

• We expect the NZD’s losses against the USD to be modest compared to other risk-on currencies where the case for monetary policy normalisation is much less compelling

The NZD has been resilient despite no rate hike by the RBNZ and the national lockdown announcement

The NZD has been remarkably resilient after the Reserve Bank of New Zealand’s (RBNZ) surprise decision to leave rates unchanged at 0.25% earlier today (18 August), following the short national lockdown announced yesterday (17 August) by New Zealand’s government. All of New Zealand went into a ‘Level 4’ lockdown (which is the most restrictive setting, with a stringent stay-at-home order in place) from 12.00am on 18 August. The whole country, other than Auckland and the Coromandel region, is scheduled to be at this alert level for three days. Auckland and Coromandel are set to be in lockdown for longer – likely seven days.

We believe the RBNZ’s cash rate projections have moved higher and earlier since May, supporting NZD outperformance

In our view, this comes down to two key factors:

1) The RBNZ pulled forward its assessment of rate hikes quite aggressively. The central bank projects at least one rate hike this year, with another four likely before the end of 2022 – this is up by 90bp since the May Monetary Policy Statement. Meanwhile, the “peak” rate is now projected at 2.1%, up from 1.8% in the last set of projections. All this would be something of a green light to NZD outperformance despite staying on hold at this meeting.

The modest rebound in risk sentiment provided support for the NZD, in our view

2) Broader risk appetite stabilised. The NZD remains a higher beta G10 currency – the NZD generally outperforms when risk sentiment is positive and underperforms otherwise. The modest rebound in risk sentiment following yesterday’s (17 August) sell-off is no doubt helping.

We expect the NZD’s losses against the USD to be modest compared to other risk-on currencies where the case for monetary policy normalisation is much less compelling

Provided the health situation in New Zealand does not translate into a much more prolonged lockdown and significantly negative shock to domestic output, we would still expect the NZD to outperform other risk-on currencies (such as the AUD) that are much further from monetary policy normalisation, especially in light of the RBNZ’s new and more hawkish rate projections for the months ahead. However, we do see NZD-USD declining modestly against our new backdrop of a stronger USD.

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