New Zealand Dollar Outlook Soft, But Losses Could be Lighter Say BNZ
Bank of New Zealand (BNZ) forecasters have maintained their negative stance on the NZD but warn disappointing dairy prices are starting to lose their ability to shock.
BNZ strategists say they will continue to short NZD/USD into September.
The trade is maintained in part to a wide stop loss setting that allows for some short-term strength.
Ultimately though downside is preferred on account of the Reserve Bank of New Zealand (RBNZ) expected to cut the OCR by 25 BPS in September and October, and the anticipated Federal Open Market Committee (FOMC) interest rate increase in September.
Consequently, BNZ forecasts NZD/USD to dip to 0.6200 by the end of 2015, with a further decline to 0.6000 by the first quarter of 2016.
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Do Dairy Prices Matter?
Of interest to researchers is the non-reaction to recent news of a hefty 9.7% fall in dairy prices.
Those betting against the New Zealand dollar will have been disconcerted by the apparent lack of reaction in the NZD strip.
The non-reaction leads BNZ to deem the NZD market quite impermeable to negative dairy news; no doubt a pessimism fostered by continued downturns in New Zealand’s agriculture sector.
A crux in New Zealand’s falling dairy prices has been overproduction, both at home and global; a problem that has not been sufficiently addressed by any of the parties.
With a weakened Chinese economy and Chinese Yuan devaluations, the supply and demand imbalance is even starker and more concerning. Much more is needed for this sector to rebound.
BNZ considers the indifferent NZD reaction to recent dairy auctions as a reflection of the heavy short NZD market, which has been ongoing through June.
Since July, net speculative short positions remain large but has fallen by a 1/3.
“The record-breaking speculative short position built up through June and mid-July showed little sign of slowing
downward momentum, as would conventionally be expected. We’ve given up on expecting an ugly short squeeze to eventuate. But there are some signs that modest profit-taking is helping to support NZD despite poor fundamental news,” say BNZ.
In terms of the USD, there is certainly eagerness as the market awaits a September liftoff but there are some who believe Chinese Yuan devaluations and other US economic conditions will delay yet another scheduled interest rate increase.
If this rate hike is not realised, the NZD/USD will definitely gain some support.
BNZ’s report did predict a near-term bounce but BNZ still stands staunch in the September liftoff camp, despite sufficient time between now and September for plausible reasons to occur for yet another delay.
BNZ remains sellers of the NZD against the USD for now into September but maintains wariness “due to a lack of foreseeable major event risks that might reliably be NZD/USD negative, a still-heavily short NZD market that has shown signs of lightening up and the prospect of broader USD malaise”.
