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Kiwi eyes three year high ahead of RBNZ policy update

NZD - New Zealand Dollar

The New Zealand dollar held onto and consolidated gains above 0.73 US cents through trade on Tuesday. Direction across currency markets was largely muted when compared to Monday’s price action and the Kiwi maintained a narrow range through much of the overnight session. Having marked fresh three-year-highs at 0.7343, the NZD fell marginally short of extending the upturn as attentions turn to today's RBNZ policy announcement. The broader narrative has shifted significantly since the bank's last forecast update in November and the expected requirement for Monetary policy stimulus has contracted. Domestic economic performance is ahead of early estimates while the global growth outlook continues to improve. As the reflation narrative continues to push the NZD higher, the question shifts to what the RBNZ will choose to do. We expect policymakers will elect to maintain the current QE platform at least until the start of H2 with a plan to tapering though the end of the year. The RBNZ will be wary of prompting further NZD gains, and we suspect it will err on the dovish side. Yet when compared with commentary from Fed Chair Jerome Powell overnight, wherein the FOMC expects to maintain its program of support well into 2022, it may be hard to control NZD expectations as investors chase the higher yield.

Key Movers

Movement across currency markets was largely muted through trade on Tuesday as price action across treasury yields calmed and investors looked to take stock and consolidate Monday’s move. The US dollar edged marginally lower after Fed Chair Jerome Powell Testified in front of lawmakers, repeating the banks now familiar mantra. There is little expectation the Fed will shy away from the current program of monetary policy stimulus with supports likely to be in place until the recovery shows signs of evening out. At present, the path ahead for the US remains uncertain and while there are signs economic activity will rebound strongly following the pandemic, the pressures within the labour market remain elevated and a return to full employment is likely years away.

The Great British pound came under some pressure following an uptick in unemployment Tuesday. New employment fell by more than anticipated pushing the unemployment rate to its highest level in nearly 5 years. A stark reminder of just how badly the UK has been hit by the pandemic. With some 4 million Britons supported by wage subsidies, the true labour market condition is likely much worse. Having tested a break below 1.4050, Sterling found renewed momentum through the latter half of the session and opens this morning above 1.41.

Attentions today turn to the Bank of England and Monetary policy hearings.

Expected Ranges

NZD/USD: 0.7280 - 0.7390 ▲

NZD/EUR: 0.5990 - 0.6080 ▲

GBP/NZD: 1.9080 - 1.9320 ▲

NZD/AUD: 0.9210 - 0.9330 ▲

NZD/CAD: 0.9180 - 0.9280 ▼