New Zealand Dollar Forecast to Remain Supported But Warning Signals are Flashing

The NZ dollar was the best performing currency in the leading G10 sector last week, however we hear from a number of analysts that we should be cautious on the NZD's prospects. 

The NZ dollar remains well supported, particulary against sterling, as the effects of the better-than-expected labour market numbers announced last week continue to be felt.

Improved sentiment towards the New Zealand unit has ensured the GBP to NZD conversion slipped from above 2.2046 at the start of the previous week to a Friday close of 2.1866. The the time of writing the exchange rate is at 2.1725.

The NZD to USD conversion rose from 0.6488 on Sunday the 31st to close at 0.6632 on Friday and is presently quoted at 0.6632.

The employment data was key as it suggests a much more benign economic climate and has increased the likelihood that the Reserve Bank of New Zealand (RBNZ) holds back from lowering interest rates by a further 0.25% at their March meeting.

Clouds Gathering?

How long can the pro-NZD sentiment last? If you ask some big-name analysts you will be met with scepticism.

Nick Tuffley, ASB's Chief Economist, is for example concerned by the lack of inflationary pressures in New Zealand.

"Unlike the RBNZ, we are concerned that inflation remains surprisingly weak. We noted at the RBNZ OCR Review that ‘core’ inflation indicators are currently mixed," says Tuffley.

The measure of core inflation the RBNZ is emphasising is the highest of a range of measures but also the most unvarying.

Both of these attributes make ASB wary that the RBNZ may continue underestimating the risks of headline inflation continuing to undershoot the RBNZ’s outlook. The bottom line? ASB believe another NZD-negative interest rate cut should be announced before long to safe-guard the economy in the event of a continuation of falling prices.

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.

 

Then, there is reason to believe the labour market numbers could be one-off. Institutional analysts ABN Amro for one, were not impressed, and after digging deeper into the data noted the falling participation rate:

“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.”

Indeed even the 0.7% improvement failed to change their expectations that the RBNZ would reduce by 0.25% the bank rate by as soon as March.

CIBC’s Jeremy Stretch, also continues to be bearish the kiwi – citing the continued fall in dairy prices – which declined by -7.4% at auction on Tuesday -  as one major reason:

“Discussion of further reduction in Fonterra dairy milk payouts, further marginalising farm incomes, favours additional NZD downside, not least amidst presumptions of the RBNZ being forced to close the spread differential with Australia.

“Consequently we would maintain a bias towards looking for AUD NZD topside. We have set topside targets set at 1.1087, a break below 1.0595 suggests we are wrong.”

As far as the week ahead goes, these themes will remain in stasis probably as there is little data directly from New Zealand and global volatility may be impaired due to the week-long national holiday in China to support the new year.

What domestci data there is, starts with New Zealand Card Spending m-o-m in January, on Tuesday, with the previous result showing a 0.1% rise.

This is followed by REINZ house sales in January out on Wednesday, which came out at 3.5% previously, and NZ Performance of Manufacturing Index in January, which is expected to come out at 56.7.

As far as the charts go GBP/NZD appears to be resuming its down-trend – first stop the 2.1516 where the S1 Monthly Pivot is situated and the key 2.1512 lows four points underneath it.

A clear break below those key lows would probably elicit a deeper penetration all the way to the S2 Monthly Pivot at 2.1074, as the former down-trend resumed and gained significant traction and conviction.

Money Flow a little soft however as pace of decline fades pore-NFPs, however, this may not be indicative.

For confirmation of a break below the pivot and the lows I should ideally wish to see a clearance below 2.1390.

Meanwhile NZD/USD has rotated at resistance supplied from a legacy trend-line.

It is selling off quite strongly now, given added impetus by U.S data which saw a rise in wages and a fall to 4.9% in the unemployment rate.

Risks seem biased to the downside now, and a break below 0.6506 would probably lead to a move down to 0.6418.

MACD is also still in bearish territory.

AUD/NZD: Expected Range

The USD regained some poise following the solid labour force report for January, but US stocks remained under pressure.

Global risk sentiment will drive both currencies today.

The AUD lost 1.8% on Friday, while NZD fell 1.4% causing the AUD/NZD cross to dip back below 1.07. "Our bias is for the cross to climb from here, however entry levels are important. In 2016 the cross has averaged 1.0740," say ANZ Research in a note to clients.

ANZ's expected range: 1.0610 – 1.0720