New Zealand Dollar: ASB Bank Forecast More RBNZ Rate Cuts Ahead
Recent New Zealand economic data highlighs the downside risks posed to the economy and currency warn analysts at ASB Bank in Auckland who foresee the RBNZ cutting rates again in 2016.
ASB Bank have maintained a soft stance on the NZ dollar noting the October labour market data release which "was a shocker, with the employment falling 0.4%."
The unemployment rate lifted to 6% as a result.
"Further, we continue to expect the unemployment rate to continue to rise above 6.5% over the coming years, as net migration outpaces job growth. We expect growing slack in the labour market to keep a lid on wage inflation. As a result, domestic inflation pressures will also remain subdued," says Jane Turner at ASB Bank.
The result reinforces our view the RBNZ should cut the OCR again in December and ASB still see the risk of further rate cuts next year.
The position appears to be at odds with the financial market place though, at the time of writing the New Zealand Dollar is an outperformer. Moves higher are being driven by higher bond yields which suggest an RBNZ that may not be looking to cur rates anytime soon.
"Indeed, a gauge of the priced-in policy view implied in OIS rates moved to the highest level since late April. The indicator now shows traders are no longer convinced that another rate cut is due in the next 12 months," points out Ilya Spivak, currency strategist at DailyFX.
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The trajectory in New Zealand interest rates will be the main mechanism to longer-term moves in the NZ currency; these interest rate moves are a response to economic conditions so labour market figures and dairy prices will be watched closely.
The outlook for the dairy sector is negatively aligned with latest data confirming a soft trajectory that may remain in place.
ASB do however say they remain fairly upbeat on the dairy outlook.
"NZ production is set to contract significantly this season and once the effects of this are more noticeable on international markets, prices will drift higher once again. Nonetheless, farmer’s cash flows are extraordinarily tight and delays to prices recovering are likely to result in further cut backs in discretionary spending in rural regions," says Turner.
New Zealand Dollar Forecasts
In light of their expectations on dairy prices, the labour market and responses from the RBNZ, ASB say they still expect further NZD weakness from here, though the risk is the NZD doesn’t fall quite as far as forecast.
"We expect the NZD/USD exchange rate to ease below 0.60, and trade in the high 0.50s over early 2016. We anticipate the Reserve Bank of New Zealand will cut the Official Cash Rate to 2.50% in December," says Turner.
ASB expect AUD to ease to 0.6500 by Q1 next year, and NZD/AUD to ease modestly lower over the year ahead.
Their NZD/EUR forecasts have the cross rate trading in a range centred on 0.55 over the year ahead, while they expect NZD/GBP to ease below 0.40 by early 2016.
