New Zealand Dollar Report

Report by PwC Treasury Advisory 9 February 2021 Table of contents

NZD/USD forecast and generic hedging recommendations 3

NZD/USD remains within range as data continues to print strongly 4

Key drivers of the NZD/USD exchange rate outlook 6

Get in touch 7

pwc.co.nz/services/treasury-and-debt-advisory 9 February 2021 PwC 2 NZD/USD forecast and generic hedging recommendations Spot rate: 0.7165 Exporter hedging recommendations:

● 0 - 12 month = Use existing hedging. Ensure midpoints are maintained with orders between 0.7100 and 0.7010, with staggered orders to 0.6930 in order to be near maximums. Clients contact us for specific recommendations. ● ● 12 - 24 month (non-filter test activated) = Target moves back below 0.7000 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 above 0.7150. continuing to provide upward pressure on the exchange rate (EUR through gradual ● fiscal integration, AUD via strong commodities and RBA settings, equities through ● 6 - 12 month payments = Should be well hedged. Replenishing recently post-vaccine upward swing and rotation). Equity market pricing extremely optimistic, so struck orders between 0.7200 and 0.7300 to be halfway between slower acceleration expected in 2021, tempering the extent of NZD strength. midpoints and maximums. ● USD outlook relatively soft over 2021 once COVID pressures are contained and global vaccine sentiment begins to take hold. Renewed US stimulus underpins this too. ● Recent rapid strength in NZD poses risk that RBNZ will still want to do more as it reduces inflation pressures and squeezes the productive sectors of the economy. Short-term movement lower expected but not sustained.

pwc.co.nz/services/treasury-and-debt-advisory 9 February 2021 PwC 3 NZD/USD remains within range as data continues to print strongly

Globally, risk sentiment continued to claw higher last week, at least as measured by equities. The US benchmark S&P 500, and from a broader perspective, the MSCI All-Country World Index, advanced by more than 2%. By contrast, the risk-related NZD/USD saw a trough-to-peak move of a shade over 1%. Rather than the seemingly never-ending equity advance, the narration of the Kiwi story last week was shared by domestic data (or, more to the point, it’s implications for the RBNZ’s Monetary Policy Statement later this month) and the US dollar.

Fortune favoured the mighty Greenback through the middle of last week, the broad-based strength contributing to a subduing of the Kiwi-dollar. That pressure subsided following the expectation-miss of the pivotal monthly Non-farm Payrolls release. In fact, it has been further declines in the dollar this afternoon (Monday) that enabled the NZD test interim technical resistance levels near 0.7230 - 0.7254 has been the high thus far.

With little of note on the domestic data diary this week, the NZD/USD will likely continue to take its directional cues from the US dollar over the coming days. From a US data perspective, inflation numbers (Thursday morning) are the dominant global While domestic employment data captivated attention during the early part of last release, but may not gain the currency-traction of times gone by given the Fed’s week, and contributed to a catapulting of the NZD/USD on the day, over the past previous comments regarding being happy to allow inflation to run beyond the 2% seven days our local currency has traversed a fairly familiar trading range path. target. Dollar sentiment may well be determined by the less tangible (and less

“chart-able”) headlines - especially regarding fiscal stimulus and the current staple, Buying interests emerged on dips toward 0.7130, with the region rebuffing three Covid vaccine distribution. separate downside attacks. On the other side of the coin, not even the

expectation-smashing headline unemployment number (or the forecast-failing US Looming on the horizon is the RBNZ’s MPS (24 February). Until we receive forward Non-farm Payrolls data) was sufficient to sustain a break above 0.7220. That being guidance from Adrian Orr, formally via the MPS less formally via and press said, we have this afternoon (finally) seen the NZD/USD poke a nose above 0.7250 conference, the New Zealand dollar should continue to trade a volatile range, the - the highest level traded since early January, though still well within the broader volatility stemming from the machinations of the Greenback. The general bias for a multi-month 0.7100/0.7300 range. modestly higher NZD over 2021 remains the underlying trend in this environment. pwc.co.nz/services/treasury-and-debt-advisory 9 February 2021 PwC 4 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 net long NZD, • Relative GDP outlook in favour of NZ at the • NZ real GDP growth outlook past the worst (but albeit the net % long has fallen to the lowest level moment. US economy remains resilient despite variable). Massive fiscal easing and support to since early December as short sellers increase high COVID case count. Stimulus proving large. economy; very wide budget deficits - more spending unfolding again given latest COVID-19 their positions. • NZ’s delay in printing GDP data (and our outbreak and possibly down the line. Low debt • Having broken 0.7250, the recent 4 week range expected cautiousness to re-open borders) likely starting point affords New Zealand with flexibility has been broken to the topside if it can be to lead to more market focus in late Q1. and options. sustained. Wider range remains in place. • Rebound in economic activity and sentiment • US deficits widening significantly from a worse Investor sentiment indicators likely to slow now that direct fiscal starting point and will require weaker USD to support channels are moderating. • COVID-19 hospitalisations and deaths are fund. declining across the US and Europe, however Monetary policy / inflation China other distractions have upset equity markets in • RBNZ now more reserved on prospect of negative • Chinese economic activity remains steady as recent weeks. NZD/equity correlation weakening. interest rates. However, recent NZD strength providing some support to Australia and New • Growth expectations now needing to be met by demonstrates the extent to which the currency is Zealand. US/China and AU/China geopolitics lofty valuations and expectations. starting to get away on the RBNZ. Higher inflation remain a risk event, with risks likely towards Short-term fair value model in Q4’20 reduces probability of negative rates. further deterioration. • Largely stable at 0.7180 driven by rise in global • Federal Reserve will keep monetary policy extra Medium-term fair value model equities and strength of dairy prices. loose for several years. Will support positive • Assessment of fundamental valuation improved environment for risky assets such as NZD. • Strong equities continue to provide support for the with future risks in direction of mid 0.7000s + NZD and risk appetite in general; however pace of over time (has already become priced). improvement is decelerating.

pwc.co.nz/services/treasury-and-debt-advisory 9 February 2021 PwC 5 Get in touch

Brett Johanson Alex Wondergem Tom Lawson Mike Shirley Partner Partner Director Associate Director T:+64 21 771 574 T:+64 21 041 2127 T:+64 27 421 0733 T:+64 27 480 9770 E: [email protected] E: [email protected] E: [email protected] E: [email protected]

Cameron Scott Stephanie Blackwell Rajeev Verma Keegan Robbins Analyst Treasury Analyst Senior Analyst Analyst T:+64 21 831 796 T:+64 21 181 0008 T:+64 21 024 86011 T:+64 21 053 8151 E: [email protected] E: [email protected] E: [email protected] E: [email protected]

DISCLAIMER: This report is for PwC retained treasury clients and is subject to the individual agreed engagement letter and the following restrictions. This report should not be reproduced or supplied to any other party without first obtaining our (PwC New Zealand) written consent. We accept no responsibility for any reliance that may be placed on our report should it be used for any purpose other than that set out below and in any event we will accept no liability to any party other than you in respect of its contents. The purpose of the report is to document our current financial market views. The statements and opinions contained in this report are based on data obtained from the financial markets and are so contained in good faith and in the belief that such statements, opinions and data are not false or misleading. In preparing this report, we have relied upon information which we believe to be reliable and accurate. We reserve the right (but will be under no obligation) to review our assessment and if we consider it necessary, to revise our opinion in the light of any information existing at the date of this report which becomes known to us after that date. This report must be read in its entirety. Individual sections of this report could be misleading if considered in isolation from each other.