The New Zealand Dollar: Low Hanging Fruit in 2020?

Heading into the new year there are many positives which may not be fully priced in to the NZD...

Commodities 1

This article is a complement to our full 2020 Market Outlook report - please download the full report for more insight into our views for major markets this year, including bold predictions from the research team! Note that all analysis and data was current as of mid-December.

2020 will likely be a game of two halves for the New Zealand dollar

Heading into the new year there are many positives which may not be fully priced in, yet if markets bid NZD too high, it will surely goad the Reserve Bank of New Zealand (RBNZ) into aggressive action.

As New Zealand’s economy is comparatively small for a developed country and relies heavily on exports, a strong currency cannot be tolerated. The RBNZ was the first to react when the Fed turned dovish last year, and later surprised markets with a 50bps cut to hammer home the point. This makes RBNZ hypersensitive to a global slowdown, and not at all ‘reserved’ in that respect. So, while there are bullish arguments for the NZD in the early stages of 2020, don’t expect RBNZ to idly stand by if the currency soars, especially with negative rates and QE on the table.

Bears are scrambling but bulls are yet to take things too far

Traders have been slow to react to a slew of better-than-expected data since October. PMIs are now expanding, business pessimism has likely troughed and milk prices (a major export) have rallied 20% year to date. The government recently announced a stimulus package which will support growth and, most importantly, the market expects RBNZ to hold rates in February which leaves plenty of time for NZD to rally over the interim.

With net-short exposure hitting a record high in October, bears are now unwinding positions but bulls remain on the sidelines. If data holds up in early 2020, bulls could rejoin the party.

How high can a flightless bird bounce?

Ultimately, there are bullish arguments for the kiwi in Q1, but the RBNZ could step in with at least a “jawbone” to try to talk the currency lower if it runs much further. Up 3.5% from its lows and around 0.7200, the closely watched TWI (Trade Weighted Index) is just below RBNZ’s forecast. If it were to extend its rally to 6%, it would be around 0.7400, which would be enough for RBNZ to step in with verbal intervention, at the very least. But history shows they’re just as comfortable with swift action.


Disclaimer: The information on this web site is not targeted at the general public of any particular country. It is not intended for distribution to residents in any country where such distribution or use would contravene any local law or regulatory requirement. The information and opinions in this report are for general information use only and are not intended as an offer or solicitation with respect to the purchase or sale of any currency or CFD contract. All opinions and information contained in this report are subject to change without notice. This report has been prepared without regard to the specific investment objectives, financial situation and needs of any particular recipient. Any references to historical price movements or levels is informational based on our analysis and we do not represent or warranty that any such movements or levels are likely to reoccur in the future. While the information contained herein was obtained from sources believed to be reliable, author does not guarantee its accuracy or completeness, nor does author assume any liability for any direct, indirect or consequential loss that may result from the reliance by any person upon any such information or opinions.

Futures, Options on Futures, Foreign Exchange and other leveraged products involves significant risk of loss and is not suitable for all investors. Losses can exceed your deposits. Increasing leverage increases risk. Spot Gold and Silver contracts are not subject to regulation under the U.S. Commodity Exchange Act. Contracts for Difference (CFDs) are not available for US residents. Before deciding to trade forex and commodity futures, you should carefully consider your financial objectives, level of experience and risk appetite. Any opinions, news, research, analyses, prices or other information contained herein is intended as general information about the subject matter covered and is provided with the understanding that we do not provide any investment, legal, or tax advice. You should consult with appropriate counsel or other advisors on all investment, legal, or tax matters. References to Forex.com or GAIN Capital refer to GAIN Capital Holdings Inc. and its subsidiaries. Please read Characteristics and Risks of Standardized Options.