New Zealand Dollar's Nadir Has Been Reached Show Westpac's Forecasts

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The New Zealand Dollar's decline could be done according to new forecasts from Westpac, the lender and investment bank.

In a new monthly forecast update, economists at Westpac note the New Zealand economy continues to undergo a much-needed rebalancing to bring excessive demand and inflation lower.

But that rebalancing is not yet done and another interest rate hike might be required before the end of the year, a development that would underpin New Zealand yields and shore up its currency.

"The economy is in a much-needed rebalancing phase with growth slowing to a below-trend pace. However, whilst off their peaks, pricing indicators still have some way to go before reaching levels consistent with inflation returning to the RBNZ’s target range," says Darren Gibbs, Senior Economist at Westpac.

The New Zealand Dollar has been an underperformer in 2023 as China's post-pandemic economic recovery failed to impress and the Reserve Bank of New Zealand (RBNZ) raced to push interest rates higher but ultimately ended its cycle ahead of its major peers.

This early finish allowed markets to bring forward the timing of a first interest rate cut, particularly in light of New Zealand's economic recession, which has seen the value of the Kiwi Dollar decline.

But Darren Gibbs, Senior Economist at Westpac, says "the outlook is subject to a number of uncertainties but we still think that the RBNZ will likely need to take further action if it is to bring inflation down quickly."



The path ahead will be bumpy, adds the analyst, especially given that fiscal policy consolidation is also likely to be a key theme over the years ahead.

One potential source of uncertainty for the NZ Dollar over the coming weeks relates to the New Zealand general election, due on October 14.

Further longer-term uncertainty awaits New Zealand's foreign exchange earning exporters relating to the outlook for demand and prices, with China’s post-pandemic rebound continuing to disappoint expectations and restrictive monetary conditions restraining demand in other major trading partners

"Consumer confidence remains down in the dumps, with the most closely watched indicators still sitting close to historic lows. While the labour market has remained resilient and incomes have grown, inflation has sapped spending power and mortgage refinancing is continuing to weigh on disposable incomes," adds Gibbs.


Above: RBNZ Official Cash Rate forecasts from RBNZ. Note Westpac's expectation for a further hike.


Nevertheless, foreign exchange analysts we follow suggest that peak pessimism over China's outlook might have passed which suggests an improved outlook for China-sensitive currencies such as the Kiwi and Aussie. Both currencies have staged a recovery through the August-September period which could signal a nadir has been reached.

The U.S. Federal Reserve meanwhile looks to have won the battle against inflation which opens the door to interest rate cuts in 2024, which would likely weigh on the U.S. Dollar and allow outperformance in risk-sensitive currencies such as the New Zealand Dollar.

"The medium-term outlook for the NZD hinges largely on the outlook for the U.S. dollar – which we expect will weaken as the Fed’s easing cycle moves closer into view," says Gibbs.

An RBNZ rate hike before year-end can add to the sense that a period of underperformance in the Kiwi is coming to an end.


Above: Effective mortgage rate projections for New Zealand from Westpac.


"We continue to forecast that at its November meeting the RBNZ will feel compelled to act on the slight tightening bias indicated last month. And we continue to think that policy easing remains at least a year away, absent a very material weakening of both economic conditions and the inflation outlook," says Gibbs.

Nevertheless, Westpac says the NZ Dollar looks set to remain vulnerable "on the crosses" which is parlance for exchange rate pairs such as AUD/NZD, EUR/NZD and GBP/NZD.

The point targets for the New Zealand-U.S. Dollar exchange rate are 0.61 by year-end, 0.61 by end-March 2024, 0.62 by end-June and 0.62 by end-2024.


Above: GDP growth (annual average) projections from Westpac.


The New Zealand Dollar to Pound Sterling exchange rate is forecast at 0.48 by year-end 2023, a level which is expected to hold through the coming year, implying some stability below current levels.

The Pound to New Zealand Dollar forecast profile is therefore a flat 2.0833, ensuring the pair remains above its post-Brexit ranges.

For the Euro to New Zealand Dollar, the forecast profile is a flat 1.8181 ahead of a tick higher to 1.85 towards the final quarter of next year.