New Zealand Dollar: This is a 'Good Rally' say ING Forecasters
The NZ dollar has been one of the out-performers in the G10 currency space over recent weeks - and this strength could continue in the longer-term.
The outlook for the New Zealand dollar has turned positive over recent weeks with Pound Sterling Live bringing a number of reports suggesting higher rates lie ahead.
Lloyds Bank is one example of an institutional forecaster who sees a turnaround while New Zealand businesses are reporting improved confidence in their own trading conditions.
In addition, a sharp rebound in dairy prices driven by supply-side factors is helping to mend New Zealand’s terms of trade.
This has led to what is being described as a ‘good NZD rally’ by analysts at ING who see the fundamental value for the kiwi now higher than the RBNZ’s forecasts.
Ahead of the RBNZ meeting (28 Oct), ING see a brief window for short AUD/NZD positions to take advantage of the divergence between iron ore and dairy prices.
“The rebound in New Zealand’s terms of trade puts less pressure on the kiwi to adjust fundamentally lower, while we think AUD still has scope for further downside,” says Viraj Patel at ING in London.
A Good vs Bad New Zealand Dollar Rally
Who knew there was such a distinction to be made on a strengthening currency?
In September the RBNZ constructed two scenarios that could potentially lead to a higher NZD:
(i) a rebound in export prices (“good rally”) or
(ii) a Fed rate hike delay due to concerns over the US economy (“bad rally”).
The central bank implicitly advocated a good NZD rally; rising dairy prices would lead to higher incomes, thus providing a boost to domestic growth.
A bad rally would weigh on near-term inflation prospects at a time when global disinflationary concerns are high; “in this case the RBNZ would take the necessary easing steps (rate cuts) to counter the impact of a stronger currency,” says Patel.
Patel concedes that both scenarios may be playing a role right now – but given that there is a strong fundamental element to the latest rebound, “we think the RBNZ will be more tolerant of gradual NZD strength and will only retain a dovish bias to deter speculative inflows.”
The turnaround in NZD’s fortunes has been driven by a sharp rebound in dairy prices. Following yesterday’s GDT auction, the headline price index has now increased by 63% since August and is back to levels seen in mid-March.
Favourable supply-side dynamics explain this trend; Fonterra’s decision to cut back on auction volumes over the next year has been a catalyst for the improved dairy price outlook.
Latest Pound / New Zealand Dollar Exchange Rates
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* Bank rates according to latest IMTI data.
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The RBNZ Tipped to Avoid Further Cuts
With regards to the all-important issue of interest rate policy recent events play NZD positive.
“While the RBNZ previously stated that further easing is likely, the surge in dairy prices has reduced the need for aggressive rate cuts,” says Patel.
Indeed, it was the failure of the overvalued NZD to adjust to the sharp decline in export prices that had led to the easing cycle in the first place.
“With the NZD TWI substantially lower and domestic terms of trade on the mend, the RBNZ can afford to take a more patient data-dependent approach like its RBA peers,” says Patel.
We see this as a notable pro-NZD development.
