New Zealand Dollar: RBNZ and El Nino Loom Large on the Outlook

Can the NZD hold onto those impressive gains made over recent weeks?

Driving the improved sentiment towards the NZ dollar are expectations that another 0.25% interest rate cut from the Reserve Bank of New Zealand is off the table.

That view will be tested on the 27th when the RBNZ delivers its October decision. Markets see little chance of an interest rate hike at this meeting and a stronger kiwi dollar will require a positive outlook suggesting that no cuts are due over coming months.

A key factor behind this more optimistic view are rising milk prices; milk is a key export for New Zealand and thus matters for the trade-weighted NZD.

Some analysts suggest the improving direction in milk prices should provide further help for the New Zealand dollar going forward through the remainder of 2015 and early 2016.

We would caution however that the El Nino effect is being underplayed - there are suggestions that some of the rising milk prices are a response to farmers cutting back on output in anticipation of a looming New Zealand drought.

But, ANZ Research warn that such a pro-NZD dynamic is nothing but a false economy - droughts tend to lead to recession in New Zealand and thus can only be bad for the New Zealand dollar complex.

In a drought-inspired recession the RBNZ would be forced to act on interest rates, perhaps more than once.

Lloyds: NZD/USD to Stabilise

Apart from the broader fundamentals driving the kiwi dollar, direction in GBP/NZD will also likely continue to find guidance from the NZD/USD rate.

We note that the US dollar and British pound are positively correlated when trading against the New Zealand dollar.

This is due to the GBP and USD moving in tandem over interest rate expectations - markets expect the US Fed and Bank of England to start raising interest rates in a similar time frame. Positive moves in the USD therefore tend to be reflected by positive moves in GBP/NZD.

Having analysts the outlook for the US dollar, Lloyds Bank say they see the NZ dollar remaining resillient from here:

"Even if the central bank continues to cut interest rates, a break below 0.60 against the USD would unlikely be sustained on a technical and fundamental basis."

Lloyds forecast the NZD/USD exchange rate to stabilise around the 0.65 level; stabilisation here could well be felt in GBP/NZD.

Latest Pound / New Zealand Dollar Exchange Rates

	Live: 2.3114▼ -0.06% 12 Month Best: 2.3553
*Your Bank's Retail Rate	2.2328 - 2.242
**Independent Specialist	2.279 - 2.2883 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

China Provides Fresh NZD Boost, More Cuts Possible in 2015

The big catalyst for near-term New Zealand dollar direction came last Friday when the People Bank of China announced a cut in the one-year lending rate and the one-year deposit rate by 25bp to 4.35% and 1.50%, respectively.

Also, the cap on deposit rates was scrapped and the reserve requirement ratio was cut by 0.50pp.

The decisions were in line with our expectation of further liberalisation of the Chinese financial markets and of further monetary stimulus, which also supports our view that the recent growth slowdown in the Chinese economy is likely to bottom in coming months.

Why does this matter for the New Zealand currency?

China is a major export market for the Southern Hemisphere nation's milk, and the strength of demand in China therefore plays heavily on the performance of the economy.

Rate cuts in China are believed to be a positive for Chinese growth and demand, thus improvements here are seen as positive for the NZD outlook.

And take note - there are warnings that further interest rate cuts lie ahead.

HSBC strategists have told clients in the wake of the October cut that further pro-NZD rate cuts lie ahead:

"The announcement suggests that the PBoC remains on an easing path in an environment of sluggish economic growth and persistent deflationary pressures. The central bank has pledged to keep adjusting monetary policy to prevent a downward spiral in domestic demand, while keeping an eye on overall level of leverage.

"We forecast another 100bps reserve ratio cut for the remainder of 2015."

Cuts in China will remove some of the pressure on the Reserve Bank of New Zealand to ease or postpone rate hikes as the negative impact of the Chinese growth slowdown has been an important factor in the recent deterioration in macroeconomic key figures in e.g. the US and Europe.

So the path forward for the New Zealand dollar looks positive in our view, but the biggest risk to the outlook comes in the form of weather and the impact of drought on the NZ economy.