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In September, the New Zealand Dollar (NZD) has demonstrated remarkable strength among the G10 currencies, registering a gain of 1.1% against the US Dollar (USD). This performance aligns with other commodity currencies. On September 5th, the NZD/USD pair hit a low of 0.5859 but has since surged to reach a high of 0.6049, potentially breaking out of the tight trading range between 0.5900 and 0.6000 that had persisted since mid-August. This recovery follows a significant sell-off in the latter half of July and the first half of August, which occurred after the NZD/USD reached a peak of 0.6412 on July 14th.
Notably, the NZD has gained strength while the Japanese Yen (JPY) has weakened, propelling the NZD/JPY pair to a new cyclical high above the 90.000-level. This level has rarely been breached over the past three decades, with previous attempts met by sharp corrections.
Even amidst a decline in global investor risk sentiment, the high beta commodity currencies, including the Australian Dollar (AUD) and NZD, have performed well. Despite a 7% decline in MSCI's ACWI global equity index since the beginning of August, these currencies have benefited from a rebound in commodity prices, which has improved the terms of trade for Australia and New Zealand. Additionally, optimism surrounding a softer landing for the global economy has alleviated downward pressure on commodity currencies. Signs of policy stimulus measures in China supporting growth have also contributed to their strength.
Looking ahead, the release of China's PMI surveys for September will be closely watched, as improvements in business confidence could further boost the AUD and NZD. Moreover, domestic developments have favoured the NZD recently. Initially believed to have entered a recession in the first half of the year, New Zealand's economy has proven to be more resilient than anticipated. In Q2, it expanded by a robust 0.9%, and the slight contraction of -0.1% in Q1 was revised to show flat growth. This growth pattern aligns with strong employment growth during the same period.
The unexpected resilience of the New Zealand economy to higher interest rates has led to a significant recalibration of the outlook for the Reserve Bank of New Zealand's (RBNZ) policy rate, akin to recent adjustments in the US rate market. The New Zealand rate market now anticipates a higher probability of at least one more rate hike at the November policy meeting, while expectations for rate cuts next year have been substantially reduced. The implied yield on the December 2024 three-month bill futures contract has risen by approximately 43 basis points this month, totalling an upward adjustment of around 175 basis points since April. It is expected that the RBNZ's forthcoming policy guidance will provide a more hawkish signal, potentially paving the way for a resumption of rate hikes.
In these circumstances, I believe there is room for the NZD to strengthen further in the week ahead. The RBNZ is expected to adopt a more hawkish policy stance in response to the unexpected resilience of the New Zealand economy.
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