New Zealand Dollar Forecast to Fall in 1-3 Month Time Frame, Higher Later in 2016
- Written by: Gary Howes
Intesa Sanpaolo believe that while the NZ dollar is likely to fall further in coming days and weeks the longer-term picture is looking increasingly bullish.
However, those waiting for a stronger New Zealand dollar will find the exchange rate moving in their favour on the longer-term horizon.
Luca Mezzomo, Chief Economist with Intesa Sanpaolo, believes the Reserve Bank of New Zealand (RBNZ) will be keen to see the exchange rate stabilise around current levels.
What is noticeable is the RBNZ has further softened its tones towards New Zealand dollar strength by eliminating explicit reference to the need for a further depreciation.
At the beginning of the year, when the exchange rate was hovering around NZD/USD 0.78, it explicitly declared that such levels were “unjustified and unsustainable”.
At that point the corrective phase began, ultimately leading the exchange rate to NZD/USD 0.70.
The pound to New Zealand dollar exchange rate (GBPNZD) began its impressive move higher in April - we saw the conversion move from the 1.93 region towards the late 2.40’s.
Latest Pound / New Zealand Dollar Exchange Rates
  | Live: 2.3118▼ -0.04%12 Month Best:2.3553 |
*Your Bank's Retail Rate
| 2.2332 - 2.2424 |
**Independent Specialist | 2.2794 - 2.2887 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
The bad news for those waiting on a stronger GBP/NZD is that it appears the currency pair may be stabilising.
“We have also left unchanged our expectation for a tendency of the exchange rate to stabilise towards NZD/USD 0.63-0.65 on a 6m-12m horizon,” says Mezzomo.
However, it is in the 1 to 3 month horizon that the New Zealand dollar is seen as being most at risk.
“This is the period in which downside pressures should be strongest, in view of both the initial Fed hike (presumably on 16 December) and of another potential rate cut by the RBNZ,” says Mezzomo.
The next RBNZ meeting is scheduled on 9 December, and this is the date on which consensus is concentrating expectations for a rate cut.
The December meeting will also bring the publishing of the new Monetary Policy Statement, containing updated growth and inflation projections.
Markets believe that if a rate cut is to happen it will happen in December - this is risky. If the RBNZ fails to deliver we could see some of the weakness unwind and the NZD pushed higher as pricing is unwound.
Then there is the issue of an interest rate rise in the UK which would certainly aid the GBP to NZD conversion higher. Lloyds Bank are forecasting that rise to come in August.
The pound traditionally rises in the run-up to an interest rate rise suggesting there certainly is the prospect of the GBPNZD rising over the 1 to 3 month horizon.
A test of the psychologically important 2.40 barrier is our base-case scenario for year-end.
The pound to New Zealand dollar exchange rate presently finds support at 2.24, a level we struggle to see the exchange rate decline below should the NZD find an unforseen burst of strength.
Longer-term, the 12-24 month horizon, is expected to see the NZ dollar stage a recovery. Intesa Sanpaolo forecast a recovery towards NZD/USD 0.70-0.72 on a 24m horizon.
“On this timeline, the improvement of the domestic and international pictures should induce the RBNZ to reverse the course of monetary policy. In particular, the central bank expects economic activity to re-accelerate to 3.1% in 2018 (fiscal year ending in 1Q 2018), revised upwards from a previous estimate of 2.7%,” says Mezzomo.
The Commodity Price Factor
A discussion regarding the New Zealand dollar’s future would not be complete without a reference to global commodity prices.
As the below shows, commodities matter:
The picture for commodities has become brighter of late and we see the supportive influence of a global recovery in prices as providing an extra layer of support for the New Zealand dollar.
Of particular concern are dairy prices, New Zealand’s main export and a key driver of NZD direction of late.
We note here that while the last auction was poor the floor in the current downtrend may be in place.
The world's biggest milk exporter, Fonterra, is bullish about global dairy prices, predicting them to rebound from two-year lows in the first half of 2016.
The upbeat forecast came as the New Zealand co-operative raised its earnings guidance for this financial year.
The message to those watching the foreign exchange markets for a New Zealand dollar transaction is that the next three months are crucial in identifying the NZD’s likely low point.
