New Zealand Dollar Forecast Lower - But the Milk Industry Could Come to the Rescue

The New Zealand dollar is forecast to struggle in the near-term but improvements in the milk industry could soon start providing support.

The cut allowed the pound to New Zealand dollar exchange rate (GBPNZD) to rise back above the 2.44 threshold.

The obvious target at this juncture is an appreciation in the GBP/NZD to 2.50 – a round number that will act as significant resistance to further gains.

However, ANZ Bank argue that any fall in the New Zealand dollar will likely only come on the back of significant data surprises as the NZD complex is close to fair value in their opinion:

“The NZD TWI is about where it should be (in between the Q3 and Q4 projections), so markets are there or thereabouts, suggesting that unless we get any major surprises, we’re not going to get a lot of locally inspired volatility.”

New Zealand Dollar Forecast to Continue Move Lower on Another 2015 Interest Rate Cut

The biggest threat to the New Zealand currency at present lies with the Reserve Bank of New Zealand whose penchant slashing interest rates shows no sign of fading.

As expected, The RBNZ cut the OCR by 25bps to 2.75% and left the door wide open for further easing.

In its September's Monetary Policy Statement, the Central Bank revised downward its growth projection to around 2% from 3% in its June statement, arguing that “the economy is adjusting to the sharp decline in export prices, and the consequent fall in the exchange rate”.

Latest Pound / New Zealand Dollar Exchange Rates

	Live: 2.3088▼ -0.17% 12 Month Best: 2.3553
*Your Bank's Retail Rate	2.2303 - 2.2395
**Independent Specialist	2.2765 - 2.2857 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

“Therefore, it will unlikely be the last rate cut in 2015 as the economy feels the pinch of a slowdown in global demand and more specifically from China. In addition, headline inflation is still far from the 2% target,” say Swissquote Bank in Gland, Switzerland.

This view echoes that of TD Securities who are factoring in another interest rate cut this year.

Swissquote believe that the RBNZ will bring the OCR even lower than 2.75% in an attempt to weaken the kiwi further, especially since the effect of such rate cuts on the housing market will be mitigated by modifications to the Loan to Value Ratio restriction rule (LVRs) and to the minimum deposit threshold for investors in Auckland.

The New Zealand dollar dropped 2.30% against the US dollar and is now trading around $0.6280.

“We were already bearish on the NZD and this dovish statement has only reinforced our view that the RBNZ wants to see a weaker Kiwi. Furthermore, we believe the recent rebound in NZD/USD will be short-lived and that the kiwi will continue to move lower against the greenback once traders start to price in the upcoming rate cuts,” say Swissquote.

Could Improving Milk Prices Prompt Interest Rate Rises?

The significantly lower NZ Dollar is also providing extra support to the all-important New Zealand dairy sector.

At the last Fonterra auction Whole Milk Powder rebounded 12%, but in NZ dollar terms it actually rose over 16%.

"It means that the farmer’s payout in NZ dollar terms is going to be much better; around about $5.00 per kg/milk solids at this stage. This is above most farmers’ breakeven levels. A sustained rebound in dairy prices would mean the RBNZ would have to review its current crusade to save the dairy sector and start addressing the housing market. This would result in interest rates rising in the second half of 2016," says a currency note on the matter from brokers Tuatara Management.

We find this an interesting observation and if this is to be the case then we could soon be facing a bottom in the NZ dollars journey lower.