New Zealand Dollar Report

Report by PwC Treasury Advisory 30 November 2020 Table of Contents

NZD/USD forecast and generic hedging recommendations 3

NZD/USD rides RBNZ sentiment and equity markets higher 4

NZD/USD historically appreciates over December 5

Key drivers of the NZD/USD exchange rate outlook 6

Get in touch 7

pwc.co.nz/services/treasury-and-debt-advisory 30 November 2020 PwC 2 NZD/USD forecast and generic hedging recommendations Spot rate: 0.7040 Exporter hedging recommendations:

● 0 - 12 month = Use existing hedging. Those requiring new hedging should ensure orders to help maintain the current hedging portfolio from 0.6930 to 0.6800 to bolster hedging. Clients contact us for specific recommendations. ● ● 12 - 24 month (non-filter test activated) = Target moves back below 0.6850 in order to layer in new hedging. Preference for collar options for any new hedging at this time. Clients contact us for specific recommendations. ● ● 12+ months (filter test activated) = 2-year filter test activation requires spot rate of 0.6016. 3-year filter test activation requires spot rate of 0.6005.

Core NZD/USD exchange rate views Importer hedging recommendations:

● Global support factors for the NZD (through equity markets, EUR/USD, AUD/USD) ● 0 - 6 month payments = Maintain maximums of policy at current rates continuing to provide upward pressure on the exchange rate (EUR through gradual above 0.6900. Mindful of considerations around exposure forecast fiscal integration, AUD with less dovish RBA policy settings, equities through accuracy/certainty also. post-vaccine upward swing and rotation). ● ● 6 - 12 month payments = Ensure maintaining hedging half way between ● USD outlook relatively soft over 2021 once COVID pressures are contained and global midpoints and maximums of policy at spot rates of 0.6900 and above. vaccine sentiment begins to take hold. Mindful of considerations around exposure forecast accuracy/certainty ● Recent rapid strength in NZD poses increasing risk that RBNZ will need to adjust its also. language and do more as it reduces inflation pressures and squeezes the productive sectors of the economy.

pwc.co.nz/services/treasury-and-debt-advisory 30 November 2020 PwC 3 NZD/USD rides RBNZ sentiment and equity markets higher

Stepping back, it’s been been a busy November, with markets pretty intent on buying the NZD thanks to a combination of local and international forces: : ● the split Congress and lack of a ‘blue wave’ following the US election result boosted equity sentiment for a more predictable US administration; ● vaccine optimism then pushed global equities and other risk assets sharply higher; ● RBNZ shifting its tone away from implied negative interest rates in 2021; ● renewed Government focus on the affordability of housing and associated questions to the RBNZ on what can be done; and ● continued ability for rising COVID-19 case numbers to be largely ignored by risk assets.

Of the above, the most fundamental when forecasting the NZD/USD into 2021 is the shift in tone by the RBNZ. Previously, we viewed the RBNZ as playing an important role in helping soften the impact on the NZD as global optimism on a vaccine and economic recovery unfolded over late 2020 and into 2021. By openly discussing the prospect of negative interest rates (and suppressing swaps rates), The NZD/USD has continued to grind higher from 0.6930 to 0.7030 in a we felt this would still result in a stronger NZD over 2021, however only modestly so fairly docile week, with US markets closed for Thanksgiving at the tail end and the NZD would underperform the AUD through that period. of the last week. Today, this situation is changing. The RBNZ has softened on the prospect of It was a an odd week, with economic data playing second fiddle to the negative rates, which caused a sharp repricing of short term swap rates during the Reserve Bank’s Financial Stability Report and the back-and-forward month. The Government’s open letter on addressing housing affordability last week between the Finance Minister and the RBNZ Governor. Globally, China also adds subtle (but noticeable) pressure on the RBNZ again to continue closing continued to agitate Australia and US equities had a big sigh of relief as this door. Taken together, these factors have seen a large jump in NZ-US interest President Trump cryptically implied he’d respect the election result and rate differentials, thus making a reversal in NZD/USD much more challenging. move out in January. Interest rate differentials have not been a strong driver of currencies in recent years (given rates were broadly converging on zero), however, (continued over page) pwc.co.nz/services/treasury-and-debt-advisory 30 November 2020 PwC 4 NZD/USD historically appreciates over December

There will be challenges, delays, shortages, flare ups and other issues when these vaccines are rolled out; however expecting these to cause a momentous shift in NZD market sentiment feels like a low probability. The bond market has largely returned to ‘pre-Pfizer’ levels - an acknowledgement that fundamentally the global economy remains weak, inflation pressures remain suppressed and interest rates will globally stay low for the medium term. However, with the Federal Reserve continuing to underpin market confidence, equity markets are not as fussed and it seems that will remain the case going forward. Some equity market profit taking is expected as forward-looking activity indicators soften, and the progress made of US job growth slows and temporarily reverses over winter.

The RBNZ will be watching the recent NZD appreciation and formulating how best to respond. Gaining control of inflation (in consumer prices, not houses) and supporting employment is a lot easier with a lower currency, and hence we expect that this will prompt the bank to be more targeted in its messaging towards the value of the NZD.

With regard to market structure, as noted in this week’s NZD report, the FX market that can change when one central bank puts their head above the trench and remains long NZD - increasing the propensity for a reversal lower eventually. rapidly gets the attention of global investors. Ultimately though, the timing of such a move is difficult to predict and is unlikely until at least the market consolidates or upward momentum starts to fade. In the shorter term, the ability for equity markets to continue overlooking the severity of COVID-19 cases (and associated economic impact) is becoming From a technical perspective, the recent break (and hold) above 0.6800 now increasingly permanent. On the US side, Thanksgiving holiday travel is most provides strong support that will make large NZD retracements challenging without likely to push daily case numbers above 200k/day over the next few weeks. a genuine ‘fundamental push’. Analysis of December NZD/USD movements But will manufacturing activity indices shrugging off these moves and suggest that traditionally the NZD moves higher as the year winds down (average emergency approval for vaccines around the corner, it seems reasonable move over 20 years is 0.9 US cents, refer to chart). While this doesn’t really tell us that such an increase in cases will not materially move the needle on broader much about the future, it overlays the sentiment that any selling pressure may market sentiment. prove short lived into year end, limiting downside movements in the currency. pwc.co.nz/services/treasury-and-debt-advisory 30 November 2020 PwC 5 NZD/USD exchange rate - key drivers and outlook

1 month horizon 3 month horizon 12 month horizon

Speculative market positioning and technicals Relative GDP growth performance Government fiscal balances • Speculative positioning remains long NZD, • Relative GDP outlook is mixed as US economy • NZ real GDP growth outlook past the worst (but however gross shorts also increasing as investors remains resilient despite high COVID case count. variable). Massive fiscal easing and support to economy; very wide budget deficits - more spending load into the NZD both long and short. To reverse • New Zealand lockdown was severe and certain unfolding again given latest COVID-19 outbreak and lower once uptrend slows and profits taken. sectors remain under pressure, but open possibly down the line. Low debt starting point • Having held above 0.6800 last week, resistance is economy now is providing support. affords New Zealand with flexibility and options. beginning to mould into support, making • NZ’s delay in printing GDP data (and our • US deficits widening significantly from a worse movements lower more challenging. expected cautiousness to re-open borders) likely starting point and will require weaker USD to fund. Investor sentiment to lead to more market focus in Q1 2021 China • COVID-19 cases continue spike across Europe • Rebound in economic activity and sentiment • Chinese economic activity remains steady as and the US and current vaccine sentiment now indicators likely to slow now that direct fiscal providing some support to Australia and New well priced. Modest pullback expected in risk support channels are moderating. Zealand. US/China geopolitics worsening again, and assets as economic activity moderates. Monetary policy / inflation risks likely towards further deterioration and • Recent “Five Eyes” announcements poses risks spreading. to provoking Chinese retaliations. • RBNZ now more reserved on prospect of negative interest rates. However, recent strength Medium-term fair value model Short-term fair value model demonstrates the extent to which the currency is • Assessment of fundamental valuation improved with • Largely stable at 0.6830 driven by rise in global starting to get away on the RBNZ and a change in future risks in direction of mid 0.6000s + over time equities and interest rate differentials over the tone is increasingly needed. (has already become priced, potentially too soon). past two weeks. • Federal Reserve will keep monetary policy extra • Dairy price outlook has been variable but reasonably • Strong equities continue to provide support for the loose for several years. Will support positive resilient. NZD and risk appetite in general. environment for risky assets such as NZD. .

pwc.co.nz/services/treasury-and-debt-advisory 30 November 2020 PwC 6 Get in touch

Brett Johanson Alex Wondergem Tom Lawson Rajeev Verma Partner Partner Director Senior Analyst T:+64 21 771 574 T:+64 21 041 2127 T:+64 27 421 0733 T:+64 21 024 86011 E: [email protected] E: [email protected] E: [email protected] E: [email protected]

Keegan Robbins Theo Taylor Cameron Scott Analyst Analyst Analyst T:+64 21 053 8151 T:+64 21 162 6713 T:+64 21 831 796 E: [email protected] E: [email protected] E: [email protected]

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