The promise of more monetary policy normalisation should support gains in NZD – CIBC

The kiwi has consolidated a strong performance as the Reserve Bank of New Zealand (RBNZ) began the process of policy normalisation, hiking the cash rate 25bps in October. Economists at CIBC Capital Markets believe that the New Zealand dollar is underpinned as the central bank is set to continue its monetary policy normalisation.

Expectation of RBNZ hikes provides support

“With the RBNZ to hike again this month and continue that process next year, and the cash rate expected to reach 1.50% from the current 0.50%, we expect rate differential support for the NZD to show via appreciation on a number of crosses.”

“We recommend being buyers of weakness in NZD vs AUD, EUR and JPY. Key driver for moves will be the divergence in monetary policy, both actual and outlooks.”

“We exclude trades vs the USD at this point as the Fed is closer than the others mentioned to normalisation. Still, we also highlight moderate support for NZD/USD down to 0.7000, which was the area of previous highs. More major support will be found ahead of 0.6800-0.6850.”

“The transmission mechanism from higher rates to the currency is not always straightforward. All else equal, if activity was not also picking up, higher cash rates would be a headwind to asset prices and the currency. In the case of New Zealand, activity has been strong and is expected to remain so.”