New Zealand Dollar's February Blues Just a Blip says Westpac

Above: The price of NZ lamb and mutton products is forecast to appreciate over the next six months. Image © Adobe Stock.


February was a month of decline for the New Zealand Dollar, but  2023 will still be a year of appreciation says one of New Zealand's major lenders.

Westpac says it maintains a constructive stance on the domestic currency thanks to the full reopening of China's economy, rising NZ-specific commodity prices and the return of tourists and students.

The currency's upside potential will nevertheless be limited by reduced domestic consumer confidence and spending power as New Zealand house prices are forecast to fall further, bottoming some 21% lower than the 2021 peak.

Indeed, the research comes at a time of New Zealand Dollar weakness that leaves it the biggest loser amongst the Group-of-10 major currencies over the course of the past month

"Recent developments have seen the NZD/USD pull back to around US$0.62," says Westpac. "However, we anticipate that this move in currencies is likely to prove temporary and that recent trends will reassert themselves over the course of the year."


Above: NZD has been the worst-performing major currency over the past month.


The retreat owes itself, to a great degree, to the New Zealand Dollar's positive correlation with broader investor risk appetite, meaning it tends to decline when the major stock markets retreat.

Global stock markets have fallen back over February as investors have turned cautious following the rise in expectations for further interest rate hikes at the U.S. Federal Reserve that follows a stronger-than-expected run of economic data.

"US labour market data, in particular, was strong over January and this saw risk aversion increase in currency markets, with investors favouring the US dollar again," says Westpac.



But strategists say this should prove temporary and a trend higher in NZ Dollar exchange rates is likely.

"This view is predicated on the view that global central banks win the inflation battle over the coming years. And that as this happens, riskier currencies like the New Zealand dollar regain further strength at the expense of safer currencies like the US dollar," says Westpac.

Aiding the Kiwi Dollar will be a boost to New Zealand exports and still-substantial hikes in RBNZ interest rates.

Westpac expects the RBNZ's cash rate to reach a peak of 5.5% in the next few months, from 4.75% currently. This would put it on par with the expected peak in the Federal Reserve's interest rate, but higher than those in the Eurozone, UK, Japan and Australia.

Such a rate 'advantage' could underscore the currency.


Above: RBNZ OCR forecasts from Westpac.


New Zealand's key exports of dairy, beef, lamb, forestry and horticulture are meanwhile all expected to see their value increase over a six-month timeframe, boosting the country's terms of trade.

"After peaking in early 2022, New Zealand’s commodity prices are ascending again. The price trend links back to rebounding Chinese demand following the recent sudden end to China’s Covid Zero policy," says Westpac.

But the potentially more significant boost to the terms of trade is expected to come from a boost to tourism exports as visitors return to New Zealand's shores.


Above: "Monthly international visitor arrivals, seasonally adjusted" - Westpac.


"Providing some offset to the softening in domestic demand is the post-pandemic recovery in international tourism and other services exports. International visitor numbers have climbed rapidly since the border reopened and have now retraced around two-thirds of their pre-pandemic levels. We expect to see further increases in visitor numbers over the coming months," says Westpac.

Westpac expects New Zealand's exports via the education sector, which accounted for around 5% of New Zealand's total exports prior to the pandemic, to also rebound.

"The Chinese government has recently mandated that its students must study in-person (as opposed to online) for their overseas qualifications to be recognised. That requirement signals a sharp recovery in student numbers over the coming months," says Westpac.

Taken together, the developments lead Westpac to hold a New Zealand Dollar to U.S. Dollar exchange rate forecast of 0.65 by mid-year and 0.65 by year-end.

The New Zealand Dollar to Pound exchange rate forecast is set at 0.53 and 0.54 for the same time period.

This gives a GBP to NZD cross of 1.89 and 1.85, implying a steady downside for Sterling.

For the New Zealand Dollar to Euro rate, the targets are a flat 0.60 (EUR/NZD 1.67).

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