NZD/USD : RBNZ Rhetoric

(Sun, 27 Dec 2020). If there’s something we’ve learnt in 2020, it is that planning ahead doesn’t always work out as expected. Winding back to last year, none of the forecasts, despite how well they did or didn’t perform, were made on the belief that a worldwide pandemic would shock global markets leading to some of the highest volatility seen since the 2008 financial crisis.

Looking ahead, the macroeconomic environment seems to suggest further economic weakness in the first quarter of the year as vaccines are put in to place, followed by a strong recovery in the following months. For now, increased liquidity is likely to remain in the markets as central banks like the Federal Reserve have pledged to keep interest rates low, possibly until economic data shows a full recovery. This is likely to keep the US Dollar subdued, continuing its current depreciation well into 2021. Additionally, risk-on sentiment given an improvement in worldwide outlook should keep the US Dollar underperforming even if the US economy performs well.

Meanwhile, the Reserve Bank of New Zealand has played a key role in improving expectations of monetary policy in the year ahead. Markets have now completely removed the idea of negative rates as house prices have become a part of the bank’s remit, which reduces the need for more monetary easing in the short-term.

The New Zealand Dollar has been the best performing currency towards the end of the year, appreciating 6.8% against the US Dollar in November alone. I expect this appreciation to continue into the first half of 2021. My price target would be aimed at the 0.7300 -50 mark, at which point the NZD looks to be far overstretched and expensive.

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