"Near-term strength may persist, but current NZD levels are good medium-term selling opportunities." - BNZ.
The New Zealand dollar remains the currency to catch with recent weeks providing markets with frantic recovery moves after what was has been a weak 2015.
Driving the recovery is the observation that the RBNZ is unlikely to cut interest rates again.
The view was solidified on Thursday the 15th October after the Manufacturing PMI for September reat at the highest levels since February this year at 55.4 confirming the New Zealand economy is moving ahead at a decent pace with the devaluation of the currency playing its part.
"The proportion of positive comments for September picked up a touch with growth in new customers and a more competitive NZD cited as reasons for more optimism,” says a comment on the data from TD Securities in Singapore.
In the wake of the data the British pound to New Zealand dollar exchange rate fell over a percentage point day-on-day to reach 2.2513 - the lowest level since June.
The New Zealand to US dollar exchange rate read at 0.6869.
The progression of interest rates is fundamentally important for the outlook of the NZD.
Currencies continue to be driven by interest rate differentials - the higher yield offered in New Zealand over recent years (2.5-3%) has benefited the NZD, particularly when compared to countries like the UK with a base rate set at 0.5%.
When the gap closes that advantage is eaten away and the currency of the country with the declining interest rate advantage also declines.
Hence, we saw the New Zealand dollar lose ground through the opening stages of 2015 on the three interest rate cuts at the RBNZ.
No More Interest Rate Cuts?
The trend lower in the kiwi dollar has continued in anticipation of further interest rate cuts.
However, that trend could stall and even reverse if markets get the message that no further rate cuts are likely.
Step in the RBNZ Governor Graeme Wheeler who on the 14th of October gave a strong hint that no further interest rate rises were coming.
The Governor said further rate cuts must be constrained on two observations:
(1) there is little evidence that reducing rates further will boost growth and, in turn, inflation and
(2) further rate cuts risk pouring more fuel on an already blazing housing market.
In an important development for the Kiwi the RBNZ also reaffirmed its September MPS news that it is becoming more relaxed about getting CPI inflation within the target band and less focused on hitting the 2.0% mid-point.
“Trying to raise inflation by cutting interest rates in this environment is like pushing on a piece of string – highly unproductive. Consequently, and rightfully in our opinion, Governor Wheeler is now saying lets treat this target more flexibly both in terms of the levels we are aiming for and the time it might take to get there,” says Stephen Toplis at BNZ.
The message will certainly have economists pencilling in changes to their New Zealand dollar forecast profile, and the odds favour the majority of any changes pricing in a stronger NZD.
While most forecasts presently see a weaker New Zealand dollar in 2016 the upgrades will likely mean the floor will be higher.
Having put the recent developments at the RBNZ together, BNZ say they feel more comfortable that, after one more rate cut this year, the RBNZ will pause to survey the landscape.
“The balance of risks will still favour further interest reduction thereafter but the perceived hurdles to doing so have just got higher,” says Toplis.
Sell the NZ Dollar Say BNZ
Despite the return-to-form in NZD strategists at BNZ reckon it could be time to sell the currency ahead of a return to weakness.
"NZD’s outperformance over the past month has been exceptional. From hitting our year-end targets earlier than expected, they now seem far from reach. For us, the strong recovery is illustrative of the wide ranges we expect to prevail over the coming 12 months. Overall, we still forecast NZD to underperform major currencies," says a note from BNZ's corporate team.
Central to the downside forecasts is the observation that the NZD is reflexive to risk appetite on global markets.
Analysts believe there is a great deal more uncertainty about the near-term direction for currencies than there was just a few months ago.
"Our central scenario envisages US rates continuing to rise in relation to peers, and for volatility to remain high. That combination should be strongly negative for NZD. We are wary that this current spell of investor optimism will turn, perhaps on renewed emerging-market fears," say BNZ.