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Upside for the Kiwi dollar ahead?

Upside for the Kiwi dollar ahead?

As New Zealand brings its lockdown to the close, the upside for the Kiwi Dollar against the US Dollar may be on the charts. The Kiwi dollar has been exhibiting significant risk on / risk off characteristics that convey the influence of market sentiment on the pair. This is showed in the chart below with the correlation between the SP500 and NZD/USD pair

NZD/USD pair against the SP500

Quantitative easing pushes the Kiwi dollar lower

The Reserve Bank of New Zealand (RBNZ) kept interest rates unchanged at 0.25%, as analysts predicted. Furthermore, the central bank nearly doubled its Large Scale Asset Purchases Programme (LSAP) to $60 Billion, up from $33 Billion. A textbook example of an increase in money supply, resulting in a depreciation of the currency. And that was what precisely happened on the announcement.

The NZD/USD pair on the RBNZ announcement

RBNZ's Chairman Adrian Orr conveyed a dovish tone in the central bank's forecast for the New Zealand Economy. "The global economic disruption caused by the COVID-19 pandemic is expected to persist and lead to lower economic growth, employment, and inflation both in New Zealand and abroad. Even if New Zealand successfully contains the spread of the disease locally, reduced world activity will mean lower demand for many of New Zealand's exports."

Good fundamentals to push the Kiwi dollar higher

Dubbed the worlds currency, the US dollar has been exhibiting considerable risk-off attributes as is strengthens against many currency pairs. However, with one of the lowest fatality rates in the world for the Coronavirus and a positive consensus with regards to the reopening of the economy, New Zealand has become a breeding ground for optimism.

Equity markets have been conveying this cautious optimism in the markets, as the NZX 50 benchmark climbs 27% from its bottom, securing gains over the past 7 days.

New Zealand opted for an explicit elimination strategy with regards to tackling the Coronavirus, bearing the short-term pain first in hopes of a rapid recovery. This is in contrast to the United States, where movement was restricted, but full lockdown was not fully enforced in all the states. President Donald Trump has since pushed states to ease restrictions fully knowing the risks involved. "Will some people be affected? Yes. Will some people be affected badly? Yes. But we have to get our country opened, and we have to get it open soon," he states. The reopening is against the advice of Dr. Anthony Fauci, the director of the National Institute for Allergy and Infectious Diseases.

We may see a push to the upside for the Kiwi Dollar if the New Zealand recovery improves at a rate much quicker than the United States economy.

Not all good news for the New Zealand Economy

Prime Minister Jacinda Ardern's "Go hard, go early" plan for the reopening of the economy does have its costs. Analysts forecast double-digit unemployment even after the government's $12 Billion wage subsidy. 

With New Zealand keeping their borders shut to all foreign travelers, the tourism industry expects a tough road ahead. With tourism making up around 5.6% of New Zealand's GDP and around 7.5% of the nation's workforce, it is difficult to predict if businesses in the tourism industry survive the coming dry spell. 

Is it time to take a look at the Kiwi Dollar?