Pound Advances on New Zealand Dollar, ASB Forecasts Suggest Further Gains

The British pound has advanced against the NZ dollar over the past 24 hours but still has a significant amount of ground to make should it attain the forecasts set out by ASB. Here we take a look at what these latest forecasts look like.

The New Zealand dollar has lost some of its recent shine thanks to the triple disappointments in the most recent domestic releases of inflation, retail and dairy industry data.

The negative trio have undone some of the work delivered by the stronger-than-expected labour market figures from the week before.

Nevertheless, "the NZ outlook itself is actually quite reasonable. The economy did hit a very soft patch in the first half of 2015. But annual growth will bottom out above 2% and steadily increase as supportive factors continue," says Nick Tuffley, an economist at ASB.

Markets were also warned by Tuffley on over-egging their negative-NZD bets on the negative Fonterra dairy auction:

“Yes, dairy incomes will remain a drag on growth. But the impact of lower interest rates and the NZ dollar are increasingly evident. Tourism, in particular, is charging along with strong growth in visitors and in per-person spending.”

Tuffley and his team have released their latest dossier on the New Zealand dollar's outlook and their views on where they see the NZ economy and central bank heading in 2016.

Is Population Growth Masking a Sluggish Economy?

While Tuffley is positive on the New Zealand economy he points out that, “the cautionary tale about NZ’s overall growth performance is that population growth is accounting for much of NZ’s growth at present.”

2% growth in the number of people is twice the historical average rate, yet the overall economic growth at present is not much more than that figure.

“The drag from low dairy incomes is there, just hidden by all the extra people and confined largely to the regions. So although the overall economy is doing reasonably well, at an individual level the progress feels more pedestrian,” says Tuffley.

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.

 

Indeed, on a per-capita basis, there has essentially been no growth over the past year.

Scratch a little deeper and one notes that economic growth continues to slow, from a peak of 3.7% at the end of 2014, to a forecast trough of 2.2% over the first half of 2016.

The slowdown in economic momentum comes despite net migration at record levels, boosting population growth by 2% over the past year.

“We do expect growth will stabilise then recover over 2016 and 2017. Declines in interest rates and the NZD over the past year will help support growth – and further rate cuts later this year should provide an extra boost ensuring inflation lifts firmly back into the RBNZ’s target band,” says Tuffley.

Lack of Inflation a Major Concern for the New Zealand Dollar

The kiwi was dealt a blow on Tuesday the 17th when a survey showing inflation expectations from the RBNZ was shown to have reached its lowest level since 1994.

Back in December the survey showed two year inflations of 1.85 per cent, but this dropped to 1.63 per cent in the March 2016 quarter.

“A theme we having been banging the drum over for months is the lack of inflation. NZ inflation is now so missing that Where’s Wally is at risk of losing his job,” says Tuffley.

The trend over the past few years is for inflation to surprise with its weakness, even against forecasts that have also become weaker over time.

Further plunges in the price of oil are a part of it, just as they were a year ago.

“However, putting oil prices aside, inflation is very subdued and wage inflation remains weak. NZ is not alone in experiencing muted inflation, but it was notable that inflation remained inert even during NZ’s strongest period of post-recession growth in 2014,” says Tuffley.

For that reason, ASB expect the RBNZ to cut interest rates further this year.

“Further OCR cuts are by no means assured, but around June we expect the RBNZ will respond to added risks of low inflation persisting,” says Tuffley.

ASB's Updated Forecasts for the New Zealand Dollar

Turning to what this means for the NZ dollar, ASB are forecasting the pound to NZD to reach 2.3255 by March, 2.2727 by June where it should stay through September before rising back to 2.3255 in December and early 2017.

The New Zealand to US dollar exchange rate is forecast at 0.43 in March, 0.44 by mid-year through to September and 0.43 at the turn of 2017.

The euro to New Zealand dollar exchange rate is seen at 1.6949 in March, 1.7241 from mid-year through to December and 1.7544 by March 2017.

GBP to NZD Still in a Downtrend

If the forecasts set out by ASB are to be met then the UK currency will have to overcome some notable barriers, particularly from a technical point.

The exchange rate remains locked into bear territory and we will want to see the pair end the week above 2.16 at the minimum.

Should this occur bulls will want to target an advances above the 20 day moving average, presently located at 2.1823. This is important as speculators often deploy fresh 'sell' strategies at the 20 day moving average on the expectation that the market will reverse at these levels.

From here we would then be able to call a bottom in the decline and become open to considering the ASB fundamental targets.

For now though, we favour further declines.