FXStreet reports that economists at ING note that the Reserve Bank of New Zealand (RBNZ) surprised markets as it announced its QE programme will end on 23 July, acknowledging the brighter economic outlook no longer requires extensive monetary stimulus. Such a hawkish tone suggests an imminent hike, either in August or October, and NZD could therefore benefit from an attractive carry earlier than expected.

“After having significantly scaled back weekly asset purchases under the LSAP (Large Scale Asset Purchase), the RBNZ announced that the programme will end on 23 July. The move comes amid a significant improvement in New Zealand's economic outlook, with activity back above pre-pandemic levels, and household spending and investments also proving robust.”

“This meeting has paved the way for a rate hike in 2021. There are three RBNZ meetings left this year - 18 August, 06 October, 24 November - and market pricing suggests that an August hike (we're talking about 25bp hikes here) is around 65% priced in, an October hike is 86% priced in and a November hike is fully in the price. We think the probability of a rate hike already in August is approximately 50%, and will depend on incoming data.”

“We do not expect the current choppy environment for the kiwi to linger, especially considering the prospect of an earlier hiking cycle by the RBNZ. An August hike would surely prove very supportive for the NZD as this would convey the implicit message that the RBNZ is getting concerned about an overheating economy and thus prompt markets to retain aggressive hawkish bets for the coming quarters.” 

“Even if the rate hike is delayed to later in 2021, the RBNZ is clearly standing at the very hawkish end of the spectrum in the G10. In line with our view that a consolidation of the global reflationary story will allow local stories to push some activity currencies higher and revamp interest for carry trades, NZD looks set to benefit from its enviable rate profile.”

“We have pencilled in 0.75 as a year-end NZD/USD target. An earlier than expected hike by the RBNZ makes us more confident that the pair will be able to reach such a level.”