New Zealand Dollar Forecast to Have Passed its Peak as Fundamentals Set to Take Control

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The New Zealand dollar's strong January-April run is unlikely to be repeated in 2016 argue analysts who reckon the currency has peaked.

The New Zealand dollar's 2016 rally has stalled with the GBP/NZD exchange rate recovering off a base at 2.04 and climbing towards the current 2.1233.

The NZD/USD exchange rate has meanwhile fallen from a peak at 0.7054 to current levels at 0.6791.

We have seen some NZD strength over the past 48 hours with the FSR from the RBNZ and improving oil prices aiding the commodity dollar complex of which the NZD enjoys membership.

There is agreement amongst the major research houses that fundamental drivers warrant a weaker NZD going forward, however, some concessions have had to be made on the extent of that weakness.

Someone who now expects the kiwi to fall less deeply against the US dollar than previously forecast is Bank of New Zealand (BNZ)’s head of FX, Stephen Toplis, who has revised up his June forecast for NZD/USD to 0.67 from 0.65 previously, and their September forecast to 0.65 from 0.63.

The main reason he sees the kiwi remaining “stronger for longer” is due to the US Federal Reserve delaying the time when they next raise interest rates:

“A Fed on hold has created a more positive risk appetite environment, pushed up global commodity prices and led to a recovery of Asia-Pacific currencies. The NZD has been swept up in this play, even though NZ commodity prices have not matched the rise in global pricing.”

Likewise Toplis et all do not see the Reserve Bank of New Zealand (RBNZ) cutting interest rates any time soon either, because the steep house price inflation, which has made Auckland one of the most expensive places to live in the world (as a ratio to average earnings), has their hands tied: another cut in the base lending rate would only increase the housing bubble. This should further support the pair. 

Analysts at ANZ bank, however, continue to hold onto their bearish forecasts.

Although they are upbeat about the economy, saying the country show’s long term growth prospects, they think that the RBNZ will cut rates again at some point, although they don’t stipulate when.

“Thus, despite prospects for further yield reduction (we still forecast the OCR (Official Cash Rate or Interest Rate) heading lower), the NZD continues to represent an opportunity to invest in a currency with a reasonable growth story.”

They see further weakness in NZD/USD as resulting almost entirely from an improvement in the US economy:

“However, we continue to see prospects improving for the US economy over the course of 2016 – an improvement which we expect to eventually erode the relative growth story that New Zealand enjoys. It is because of this USD dynamic that we continue to see downside risks to the NZD/USD rate.”

Lloyd’s Commercial Banking’s Adam Chester see the currency ending the year at 0.64, after strengthening in the short-term to 0.70. He is less positive about the prospects for the economy. Lloyds cite the downturn in the diary industry as a concern which could prompt the RBNZ to cut interest rates lower.

He cites RBNZ’s Governor Wheeler’s explicit reference to the possibility of further easing in order to underpin flagging inflation.

Chester, however, fails to mention housing inflation concerns as a counter-force preventing the RBNZ from cutting interest rates further, and its not clear whether the omission was unintended or not:

“In the short term, we expect NZD/USD to move towards the top of its range – around 0.70.But given our central expectation of two interest rate hikes from the Federal Reserve this year, and the RBNZ likely to maintain an easing bias, especially if milk prices remain subdued, we forecast NZD/USD to move towards 0.64, by end-2016.”