New Zealand Dollar Outlook: "Hang On To Your Hats" Warns ANZ

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The New Zealand Dollar outlook is increasingly challenged, warns a leading New Zealand bank.

In its latest monthly assessment of the New Zealand Dollar, ANZ says "sentiment and the vibe" are aligned towards the downside, as are domestic and global interest rate developments.

ANZ analyst David Croy says the Kiwi Dollar is weighed down by expectations for the New Zealand economy to underperform peers, leaving "commentators to turn increasingly bearish on New Zealand, and with the NZX50 well off pre-COVID highs, it’s easy to see why markets are sceptical about the Kiwi."

He says analyst forecasts for the "big three" macro variables (growth, inflation, and unemployment) paint New Zealand in a comparatively poor light:

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In addition to a broader bearishness on New Zealand and it's assets, ANZ notes interest rate dynamics are pointing to potential downside.

"Peaks and troughs in the Kiwi and relative interest rates have often been aligned, and the one thing that does jump out is that the last time spreads were this narrow the Kiwi was below 0.60. That could be a harbinger of what’s to come, especially with the Kiwi sitting precariously near the lows seen since our last NZD Update," says Croy.

He presents the following chart to highlight the potential downside posed by NZD in light of ongoing interest rate dynamics:

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Although interest rates and global sentiment paint a somewhat bearish picture of the NZD outlook, ANZ's own assumptions are less subdued.

"Our fair value analysis for the Kiwi stands at about 0.65. This captures less easily observable variables like productivity and the terms of trade, as well as easily observable things like inflation, interest rate differentials and commodity prices," explains Croy.

ANZ's forward-looking estimates of fair value (12 months forward) are slightly lower at around 0.64, anchoring the bank's end-2025 forecast for the Kiwi at the same level.

"In a nutshell, while our forecasts are guided by the analysis, qualitatively, the Kiwi has a lot less going for it. That points to a pick-up in volatility off currently depressed levels and possibly an extended bout of NZD weakness if animal spirits (sentiment and the vibe) rather than quantitative analysis (fair value estimates and the like) rule the day. At this point then, perhaps the best thing to say is, hang on to your hats, as the saying goes!" says Croy.