Kiwi’s Rally Fades as New Zealand Braces for Negative Rates

(Bloomberg) -- The kiwi has all but priced in a negative New Zealand cash rate. All that’s left is the question of when.

After rallying more than 20% from its March low, the currency is coming under pressure as traders bet the benchmark rate could drop below zero in the first few months of 2021. Economic growth and consumer confidence data due this week may help determine exactly when this will happen.

Bets for more policy easing have gained traction after the Reserve Bank of Zealand reiterated earlier this month that it may deploy negative rates to support the economy. From Sweden to Japan, a growing number of central banks are testing the limits of unconventional tools as they seek to mitigate the fallout from the coronavirus pandemic.

“A cut in February is just as likely, if not more likely, than April or May,” Kiwibank Ltd. wrote in a Sept. 7 note. “In terms of bang for the buck, a 75bp cut to -0.5% in February would deliver not only a massive drop in market interest rates, but a significant currency decline, at least temporarily.”

Given that the kiwi slumped almost 6% the week when the RBNZ unexpectedly slashed rates by 75 basis points in March, traders will probably be paying close attention to market pricing for policy expectations.

RBNZ’s benchmark rate now stands at 0.25%. Markets are pricing in a 72% chance that it’ll drop to zero in February, with a 25-basis point reduction fully priced in by April along with a 46% probability of it falling to -0.25% then.

Expectations for rates to turn negative in February may intensify if the economy’s second-quarter contraction is larger than the 14.3% the central bank forecast in August. Economists are expecting a 12.5% decline. Third-quarter consumer confidence data will also be on the radar.

The New Zealand dollar’s momentum indicators against the greenback are beginning to turn bearish. That impetus will probably pick up if investors start to price in a greater probability of RBNZ taking rates negative in February.

Below are the key Asian economic data and events due this week:

• Monday, Sept. 14: New Zealand performance services index, Japan industrial production, India CPI
• Tuesday, Sept. 15: RBA minutes and Australian 2Q house price index, New Zealand 3Q consumer confidence, China retail sales and industrial production, Philippine overseas remittances, Indonesia and India trade balance
• Wednesday, Sept. 16: Japan trade balance, New Zealand Pre-Election Economic and Fiscal Update
• Thursday, Sept. 17: RBA bulletin and Australian employment, New Zealand 2Q GDP, BOJ policy decision, Bank Indonesia rate decision, Singapore NODX
• Friday, Sept. 18: Japan CPI

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