New Zealand Dollar Forecasts Upgraded at BNZ, GBP/NZD Target Estimates are Slashed

The New Zealand Dollar’s underlying fundamentals remain unexpectedly resillient leading BNZ to revise up their year-end forecast for the currency.

• Knife wielded on pound to New Zealand dollar exchange rate forecasts
• NZD/USD upgraded to end year at 0.66

A strong economy and the inability of the Reserve Bank of New Zealand to aggresively cut interest rates are cited as the twin drivers behind a strong New Zealand dollar in 2016.

Add to this the kiwi’s ability to benefit whichever way investor risk appetite is blowing and we have the three main reasons given by Bank of New Zealand’s Head of Research, Stephen Toplis, for expecting more upside from the currency as 2016 evolves:

“The NZD is trading like a safe-haven at the moment, rising with risk-on sentiment and barely falling on risk-off,” notes Toplis, referencing the bid the NZD caught around the UK's EU referendum.

Behind the currency's enduring appeal is the relatively high yield potential New Zealand offers foreign investors; the base interest rate set by the RBNZ stands at 2.25%, which is attractive to investors seeking higher returns on their capital in an otherwise low yield world.

Traditional safe-havens, such as the yen, Swiss franc and German Bunds, for example, have become susceptible to central bank intervention or easing, which has pushed down either exchange rates or yields - or both in the case of the yen.

In such a world the kiwi looks like a better alternative, and this has helped to propel it higher, and should continue to impact for the foreseeable future.

Toplis adds that his projections embed at least one rate cut from the RBNZ in the second half of the year, however, he also adds the proviso that due to the housing bubble and relatively strong economy, there is a risk that the RBNZ may not even cut the once:

“Our projections also embed further RBNZ policy easing – at least one rate cut this year and possibly two. That said, conviction is not high in this call as it is not straightforward. The NZ economy is tracking well, with solid levels of business confidence, a booming housing and construction market, bumper growth in tourism and still-strong net migration.”

Latest Pound / New Zealand Dollar Exchange Rates

	Live: 2.3128▲ 0% 12 Month Best: 2.3553
*Your Bank's Retail Rate	2.2342 - 2.2434
**Independent Specialist	2.2805 - 2.2897 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

Perennially low inflation, however, remains a significant reason for the RBNZ to entertain the notion of a cut, and although not 'low' by say European standards, it continues to, "undershoot the midpoint of its inflation range.”

The main obstacle to an interest rate cut, however, is high NZ house prices, especially in Auckland where there is a housing bubble, which has made it the most expensive city in the world base don incomne ratio to buy a house.

Obviously any lowering of interest rates would further increase lending and continue to blow up the bubble  – something the RBNZ want to avoid.

Yet at the same time New Zealand’s exporters are crying out for the RBNZ to cut rates to cheapen the kiwi - especially their beleaguered dairy farmers who have seen double squeeze from falling dairy prices and a stronger kiwi, which has seriously hit the country’s largest export sector.

Notwithstanding the hard-hit dairy sector the domestic economy remains in good shape, leading Toplis to conclude that in order for kiwi to weaken it would require a global rather than a local shock.

“The best chance for NZD weakness would be for the market to reassess its profile for US monetary policy – the market seems somewhat complacent at the moment that the US Fed is out of the picture for an extended period. Some better labour market data or some sort of shock increase in core CPI inflation would do the trick.”

Apart from the machinations of the Fed, other sources of potential weakness for the kiwi come from the UK and its decision to exit the European Union, as well as China, where there are now signs financial institutions are in trouble after years of easy lending:

“Weak global growth indicators, suggesting some spillover of the Brexit vote into Europe and other regions would also be NZD-negative. China’s growth profile has stabilised of late, due to stimulus earlier this year, but the country remains vulnerable to a further jolt down at some stage and that would be NZD-negative as well.”

Forecast Changes

The NZD/USD forecast for September 2016 have been upgraded from 0.65 to 0.68 while the December 2016 forecast is upgraded from 0.63 to 0.66.

The March 2017 forecast is upgraded from 0.62 to 0.66 while the June 2017 forecast goes from 0.62 to 0.65.

The GBP/NZD forecast for September 2016 is downgraded from 2.22 to 1.89, the December 2016 forecast is downgraded from 2.32 to 1.89.

March 2017 is forecast to see a rate of 1.85, down from a previous projection of 2.33.

The same estimate changes are applied ot the June 2016 target.