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The New Zealand dollar could come under pressure in the near term, but it is tipped to outperform in the long term.
This is according to a new analysis from Commerzbank, which sees a potential 50 basis point interest rate cut from the Reserve Bank of New Zealand (RBNZ).
"In the short term, we see a risk that the RBNZ will cut interest rates by another 50 basis points at its next meeting, which could put the NZD under pressure," says Volkmar Baur, an analyst at Commerzbank.
The NZ Dollar is the best-performing G10 currency when screened over a one-week timeframe, helped by news of new stimulus measures being announced in China, New Zealand's primary export market.
However, recovery potential could be limited by further RBNZ interest rate cuts as the central bank looks to stimulate the domestic economy. On August 14 the RBNZ cut its policy interest rate by 25 basis points to 5.25%, almost a year ahead of its own projections for such a move.
Now, "there is a risk that the RBNZ will cut interest rates by another 50 basis points on October 9," says Baur.
Money market pricing shows investors see one further rate cut in 2024 and an additional move is not yet fully priced. If expectations for an acceleration in the pace of easing continue to rise then NZD might come under pressure.
Above: Commerzbank's tracking of NZ inflation indicators suggests the looming Q3 release will show a fall in inflation.
"Surveys suggest that the labour market is already cooling noticeably," says Baur. "Base effects should bring inflation back to the central bank's target range (1-3%) in the third quarter, approaching the midpoint of 2%."
Commerzbank says the monthly time series for individual subcomponents of inflation released by StatsNZ shows inflation is trending lower.
However, Baur says weakness in the Kiwi Dollar will likely be limited to the short-term, and the currency looks set to appreciate in 2025.
"I expect the mixed picture to be favourable for the New Zealand Dollar," says Baur.
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"Stubborn inflation, a weaker but stable labour market, and an economy that is not quite as weak as feared should lead the RBNZ to cut rates less than the market is currently pricing in. This should support the Kiwi," he explains.
The NZD/USD exchange rate is forecasted to end 2024 at 0.62 but steadily trend higher to 0.65 by the end of 2025. The EUR/NZD pair is expected to fall from 1.81 at the end of 2024 to 1.72 by the end of next year.
Commerzbank sees GBP/USD at 1.33 at the end of both 2024 and 2025, which gives a GBP/NZD forecast profile of 2.14.
