- GBP/NZD seen going lower
- NZD/USD to recover by year-end
- But near-term weakness possible
- RBNZ tipped to increase tempo of rate hikes
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Foreign exchange strategists at the antipodean lender and investment bank see the potential for further weakness in the New Zealand Dollar over the short term but by year-end the currency should be appreciating more noticeably.
Robert Rennie, FX Strategist at Westpac, says he sees the potential for a fall further in NZD/USD to below 0.6200 during the next few days as the data calendar looks particularly treacherous.
And on a multi-week basis, "we remain cautious, with global sentiment still vulnerable," he adds.
Amongst the list of concerns for the New Zealand Dollar is global central bank tightening, recession risk and geopolitics.
The New Zealand Dollar is a traditional 'high beta' currency that tends to appreciate when the global economy is growing and demand for New Zealand's commodity exports are strong.
Therefore, ongoing headwinds facing investors are not likely to prove supportive of the currency.
When global conditions improve demand for New Zealand Dollar exports would be expected to improve while buoyant sentiment could prompt global investors to invest more in New Zealand.
In this regard, Westpac expects conditions to ultimately improve.
"By year end, if sentiment stabilises, there is potential for the NZD to rebound," says Rennie. "By then, the Fed story may be fully priced into the USD, and the spotlight could be redirected to NZ commodity prices which have a positive outlook into year-end subject to China’s economy stabilising." (Set your FX rate alert here).
Above: GBP/NZD (top) and NZD/USD (bottom) at daily intervals.
The Reserve Bank of New Zealand's (RBNZ) push for higher interest rates is also likely to offer the currency support.
Economists at Westpac last week raised their projections for the amount of hiking to come from the RBNZ; they now expect 50bp hikes in August, October and November, with the cash rate to reach a peak of 4.00%.
This would be in line with where the U.S. Federal Reserve is heading and higher than most other G10 central banks.
Previously Westpac expected just two 25bp moves in October and November.
Above: The market's expectations for where the RBNZ rate will go.
Such a ramping up in RBNZ rate hike expectations would typically be expected to be a supportive development of the New Zealand Dollar, all else being equal.
"The key factor underlying the change in our OCR forecast has been the continued strength in inflation," says Satish Ranchhod, Senior Economist at Westpac.
New Zealand CPI inflation rose by 7.3% in the year to June.
"What’s really lit a fire under consumer prices has been the strength of domestic demand. Indeed, if we look at the areas where businesses are reporting significant cost pressures, they’re predominantly in areas like the construction sector where demand has been running hot," says Ranchod.
He explains the strength of domestic demand is a big concern for the RBNZ.
"Underlying price pressures remain strong. In fact, we aren’t forecasting inflation to be back within the RBNZ’s target band on a sustained basis until 2024," says Ranchod.
NZD/GBP is forecast at 0.52 by the end of September, 0.52 by the end of December and 0.53 by the end of March.
This gives a Pound to New Zealand Dollar exchange rate (GBP/NZD) off approximately 1.92, 1.92 and 1.8866..
Westpac's NZD/USD exchange rate forecast sees 0.64 by the end of September, 0.66 by the end of the year and 0.68 by the end of March 2023.
The NZD/EUR forecasts are 0.61 for all the three timeframes.