The New Zealand dollar looks poised to recover from its sharp selloff this month, with technical support, a yield advantage over the US and hedge-fund bets pointing to gains in the kiwi ahead of a pivotal central bank
A 50 basis points hike by the Reserve Bank of New Zealand could amplify gains, while a 25 basis points increase would risk disappointing the market, undermining a rebound in the currency. Swaps traders are betting that a quarter-point hike is a done deal, with wagers split on a half-point hike.
Long positions in the currency from hedge funds have been rising for months and are at the highest level since March, while technical charts show the currency edging back toward the center of an ascending trend channel. Adding to the upbeat tone, two-year inflation expectations that climbed to a 10-year high saw the kiwi erase a week’s worth of losses in a matter of hours.
“Given the outlook for RBNZ rate hikes we no longer forecast further New Zealand dollar downside,” Commonwealth Bank of Australia strategists including Joseph Capurso and Kim Mundy said in a November 19 note.
“New Zealand dollar can appreciate further if the RBNZ is required to tighten more (or faster) than expected to constrain inflation.”
Commonwealth Bank sees the kiwi supported into year end, despite a strong greenback, and forecasts it will rally to 75 US cents by the end of 2022. Projections compiled by Bloomberg suggest the currency may rise to 71 cents this quarter and 73 cents by the end of next year. It closed Friday at 70.04 cents.
The widening yield gap between yields on New Zealand’s sovereign bonds and Treasuries adds to support, while also pointing to downside potential for the currency if the Federal Reserve begins hiking rates faster than expected.
It is also noteworthy that the kiwi has given back about half its gains since the RBNZ raised its benchmark rate on October 6 amid the greenback’s November rally.
“There is plenty of risk with the Fed and how this could keep the dollar stronger for longer,” said Paul Mackel, global head of FX research at HSBC Holdings Plc in Hong Kong. “Standing in front of that freight train could be tricky.”