BNP Paribas have released their latest forecasts and the New Zealand is expected to go lower and reach 0.65 against the US dollar by the end of the year
The kiwi dollar has found May a difficult month with weakness allowing the pound to New Zealand dollar exchange rate to push back to 2.1126 from the month's opening at 2.0888.
Taking a step back though and we see the NZD remains elevated when compared to where it started 2016.
The ongoing strength comes courtesy of the currency enjoying the highest interest rates in the G10.
This means international investors are drawn to New Zealand as a place to park their money because of higher bank rates. This in turn helps the kiwi as it increases demand for the currency.
BNP Paribas’s Charlotta Pühringer, however, suggests that the period of strength for the currency may be coming to an end:
“NZD performance was relatively strong in April, but we expect NZDUSD to trail lower over the year and target 0.67 by the end of Q2 (it is currently at 0.6882), and 0.65 by the end of 2016.”
Pühringer bases her prediction on the Reserve Bank New Zealand’s (RBNZ’s) April meeting statement which suggested it was not happy with the elevated exchange rate.
This is no doubt due to the underperformance of the country’s export sector, especially dairying, which has been hurt by falling demand from declining China. A weaker kiwi would help make New Zealand exports more attractive to foreign buyers.
The other reason for the bearish forecast is that the kiwi is trading 12.0% above its fair value (0.61) according to Paribas’s proprietary valuation model “CLEER”, and is therefore expected to fall back down so it is more in line with the model:
“CLEER™, our medium-term forecasting model signals that NZDUSD looks vulnerable to a decline to the low- 0.60s, with NZDUSD CLEER™ at 0.58 by the end of 2016.”
Due to a bearish view of commodities, however, the French bank sees the kiwi outperforming the other major commodity currencies, AUD and CAD, and AUD/NZD targeting 1.10 by year end.
Although the RBNZ did not cut interest rates at its April meeting it did reiterate that it might do in the future, and Paribas forecast one 0.25% cut by the end of Q3 2016.
With the Fed still likely to be on hold, a cut could come even sooner, and the bias will remain towards pressuring an earlier rather than later rate cut:
“But with the Fed likely on hold during 2016 we think pressure could build on the RBNZ to act sooner, and see scope for the markets to bring forward their RBNZ easing expectations.” Said FX analyst Charlotta Pühringer.