New Zealand’s Currency Jumps as Traders Brace for 2021 Rate Hike

(Bloomberg) -- New Zealand's currency and short-dated bond yields surged after an upbeat business survey drove traders to bring forward rate-hike expectations, with markets now pricing a total unwind of pandemic-fueled rate cuts by the end of 2022.

The kiwi jumped 1.1%, while the benchmark 2024 bond yields gained as much as nine basis points on Tuesday to hit the highest level since February 2020. A survey by the New Zealand Institute of Economic Research published Tuesday showed more companies expect improved business activities.

The optimism led economists at ASB Bank Ltd. and Bank of New Zealand to forecast rate hikes by November, when the central bank conducts its final policy meeting of the year. Traders dialed up bets as a result, with overnight index swaps pricing around a 90% chance of a hike by then versus around 50% as of Monday's close.

Swap markets are priced for the Reserve Bank of New Zealand to hike rates to 1% by the end of 2022, which would erase the 75 basis point cut in response to the pandemic from March 2020. The benchmark 10-year bond gained five basis points.

“Market expectation for RBNZ's first hike is now between November this year and February 2022 -- before the Fed will begin its tapering, and well before any hikes as gleaned by the dot plot,” said Patrick Bennett, head of macro strategy for Asia at Canadian Imperial Bank of Commerce in Hong Kong.

“The RBNZ has often been a leader and looks to be the same again,” he added.

With a hike seen for November, the RBNZ is set to be one of the most hawkish across all the Group-of-10 nations, second only to Norway, which had highlighted a likely hike in September.

Central banks everywhere are grappling with what's been termed the “Pandexit” by some researchers, with the Federal Reserve, U.K., Canada, Sweden and South Korea among those charting a course toward a pullback in easing.