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Outlook for NZ Dollar Ahead of First RBNZ Policy Meeting in 2021

The New Zealand dollar started the week as the strongest most-traded currency on the Forex market thanks to the upgrade to the nation’s credit rating by Standard & Poor’s. What other factors will be influencing the New Zealand…

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The New Zealand dollar started the week as the strongest most-traded currency on the Forex market thanks to the upgrade to the nation’s credit rating by Standard & Poor’s. What other factors will be influencing the New Zealand currency and what traders should watch for during the rest of the week?

The major event for the kiwi will be the monetary policy announcement that the Reserve Bank of New Zealand will make after its first policy meeting in 2021. Experts agree that the central bank will most likely keep interest rates and the size of its asset-purchase program unchanged and try to strike a balanced tone in the statement. On one hand, the latest improvement in the labor market and inflation that remains not that far from the bank’s target of 2% should encourage the RBNZ to become less dovish and reduce the likelihood of negative interest rates, perhaps eliminating it outright. On the other hand, the central bank will likely try to avoid anything that can cause an excessive increase in the exchange rate. Whatever the case may be, the New Zealand dollar will probably have a strong reaction to the tone of the policy statement. The problem for traders is that it is not just hard to predict what the central bank will say but also how markets will react to the statement.

Beyond the central bank’s meeting, there will be few important macro releases this week. Statistics New Zealand will release a retail sales report during the early Asian session on Tuesday. Analysts expect it to show a fall of 0.5% in the fourth quarter of 2020 after the huge jump of 28.0% in the previous three months. On Thursday, the trade balance for January will come out, with expectations of a NZ$630 million deficit versus a NZ$17 million surplus in December. The same day ANZ will release the final estimate of its business confidence in February. The preliminary report showed an increase from 9.4 to 11.8.

Beyond macro reports, the New Zealand currency will react to the general market sentiment, driven mainly by news about the progress in the COVID-19 vaccinations and plans for an exit from lockdowns across the world. Geopolitical news also has the potential to affect the market, in particular trade disputes of various countries with China. The metal market has a strong impact on the kiwi’s performance. The currency tracks especially close the movement of copper and iron ore. The metal market started the week strong too and has the potential to extend its good performance for the rest of the week, especially if traders continue to subscribe to the theory of a commodity supercycle.

Overall, the future looks bright for the New Zealand dollar. The outlook for global economic recovery, the strong performance of the commodity market, and supportive domestic macroeconomic indicators are all helpful to the kiwi. But the currency may still halt its advance, at least for the short term, if markets consider the RBNZ policy statement to be more dovish than expected.


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