New Zealand Dollar: Forecasters Warn of a Bumpy 2016, Commodity Market Will be Key

The NZ dollar exchange rate complex (NZD) has had a good start to February, but analysts remain cautious on the currency’s prospects over coming months.

The New Zealand dollar (NZD) was the strongest currency this week as the domestic unemployment rate in the last quarter of 2015 plunged from 6% to 5.3% and employment grew 0.9% after falling 0.5% in the previous quarter.

The news was enough to dislodge pessimism instilled by a negative diary auction, conducted hours earlier, in which it was shown prices for the country’s key export fell a whopping 7.4%.

Currency markets took cheer from the employment data and bid the NZ dollar to US dollar conversion from 0.6488 at the start of the week to the mid-week close of 0.6665.

The pound to New Zealand dollar exchange rate (GBPNZD) was meanwhile pushed lower from 2.20 to the 2.16 area we are now witnessing. International bank transfers are being conducted as low as 2.1070 while independent currency transfer providers are quoting a lot higher at 2.14.

As always though, we keep our eyes on the horizon and ask whether the employment data is enough to convince the all-important decision makers at the Reserve Bank of New Zealand (RBNZ) that there is no need to cut interest rates further.

Lower interest rates mean lower yields on New Zealand bonds which would spark an outflow of foreign capital from the country, driving the NZD lower.

Latest Pound / New Zealand Dollar Exchange Rates

	Live: 2.3088▼ -0.17% 12 Month Best: 2.3553
*Your Bank's Retail Rate	2.2303 - 2.2395
**Independent Specialist	2.2765 - 2.2857 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

The RBNZ left rates unchanged at its January meeting, as predicted, but unexpectedly shifted back to an easing bias, from the more neutral stance signalled after the December rate cut.

Whereas in December the RBNZ said that it expected to reach its inflation target with the current policy settings, it has now signalled that “some further policy easing may be required over the coming year”.

The question now is whether events prompt the RBNZ to explore “further policy easing” over coming weeks.

Employment Data Not That Strong

While currency markets rewarded New Zealand’s stellar employment numbers by bidding the NZD higher, analysts have dug deeper into the data and some are not impressed by what they have uncovered.

“Weakness in the labour market remains as the labour force participation rate recorded its third consecutive quarterly decline to its lowest level since 2013 Q2 and there are no signs of a pick-up in wage growth,” notes Roy Teo, currency strategist with ABN Amro.

ABN Amro are therefore taking the chance to reiterate their view that the RBNZ is likely to lower the Official Cash Rate (OCR) by 25bp to 2.25% as soon as March.

Around 30% of this is priced in by financial markets implying there is further scope for selling.

“Our year end NZD/USD forecast is 0.58,” says Teo.

Global Picture Remains Unsupportive

We mention that markets opted to shift focus from the dire dairy report, that has its origins in global factors, to the more positive domestic numbers.

Be assured though that markets won’t ignoring the state of the global commodity market for too long.

“We expect the NZD to remain under pressure, as the subdued outlook for commodity prices and global growth should continue to weigh on the currency,” says Charlotta Pühringer at BNP Paribas.

Falling commodity prices and China’s economy remain key concerns for New Zealand’s economic outlook.

In particular, Fonterra, the world’s largest dairy exporter and mainstay of the NZ economy, cut its milk price forecast to a nine-year low in January.

Interest rate markets are pricing in a full 25bp interest rate cut at the Bank of New Zealand by Q3 2016. “We think this looks reasonable, although we see scope for easing expectations to be brought forward,” says Pühringer.

Note though that commodity prices must come under pressure for the NZ dollar to move lower.

BNP Paribas’ CLEERTM, signals that there is limited scope for NZDUSD to decline further if commodity prices remain around current levels.

Holding commodity prices constant, it is argued that NZDUSD’s fair value is projected at 0.65 at the end of 2016 and 0.64 at the end of 2017.

From a longer-term perspective, BNP Paribas FEER suggests the NZD should strengthen significantly over the next three-to-five years, with NZDUSD rising gradually towards 0.76.

New Zealand’s portfolio investment balance was flat in Q3; while the FDI surplus improved further.

“The broad basic balance is improving, in contrast to other commodity-exporter economies,” says Pühringer.