ANZ say they are reluctant to call an end to NZ Dollar's strength as other analysts turn more subdued over the currency's outlook.
- Pound to New Zealand Dollar exchange rate: 1.7257
- Euro to New Zealand Dollar exchange rate: 1.5635
- New Zealand Dollar to US Dollar exchange rate: 0.7039
The New Zealand Dollar has been rather subdued this month as it takes a breather from its strong rally.
Indeed, technically it remains in an uptrend against its major competitors; something which looks likely to extend as fundamentals remain strong.
ANZ have reiterated their bullish stance on the currency despite still expecting the Reserve Bank of New Zealand (RBNZ) to make at least two rate cuts by the middle of next year.
Any such move would typically be negative for the currency as falling interest rate yields dampen demand for NZ’s bonds which would be yielding less after the cuts.
“We are coy about jumping on a weaker NZD band-wagon despite it giving up gains of late. We view recent moves as more corrective,” say ANZ in a briefing to clients.
“While a number of global factors have the potential to accentuate this correction – namely the US Fed in play, potential for risk appetites to wane (somewhat at odds with the Fed hiking, though possibly a consequence too!), and signs of swivelling from monetary to fiscal policy stimulus – these all face challenges becoming concrete themes,” say analysts.
Until we see such a clear new theme emerge, ANZ say they remain biased towards NZD strength being maintained.
From Monetary to Fiscal Support
On the other hand, if a new landscape for global financial policy emerges – as ANZ foresee - then that too, arguably, could be positive for the New Zealand dollar.
ANZ see such a new order as being predicted on central banks withdrawing from leading the vanguard of stimulating the economy through their monetary policy measures and governments taking over the job instead, using fiscal stimulus via public spending.
“We can sense that the global policy direction (and debate) is beginning to shift away from monetary policy and towards fiscal policy,” say ANZ.
The likes of the IMF, BIS and G20 have been explicitly calling for fiscal policy to do more of the heavily lifting for some time, but ANZ say they can now also implicitly see this shift in some of the actions of central banks themselves.
“The BoJ has shifted to a new ‘yield curve target’, which many view as a response to its earlier policies reaching exhaustion point, and the ECB is showing a little more hesitancy to ease further as well (while not ruling it out completely),” say ANZ.
Part of the reason for this is central bank’s running out of ‘ammunition’ to actually lower rates any lower, and the knowledge that too low rates hurt bank profitability as witnessed in Europe and highlighted by the recent Deutsche Bank crisis.
Distortions caused by ultra-low rates and central bank bond buying are also beginning to cause concerns around the globe.
“Monetary policy is showing signs of exhaustion, and is certainly struggling to sustainably lift inflation despite the considerable amounts of stimulus provided.
“And this stimulus is arguably now creating bigger distortions than it is battling, with global debt at record levels, asset prices overvalued, capital misallocated, inequality on the rise, a possible pension-industry time bomb ticking away and financial systems facing strains.
“It is time that fiscal policy not only lends more of a hand, but becomes more proactive in trying to boost global growth in a trend as well as cyclical sense via stronger microeconomic policy,” say ANZ.
But what would the effect on the New Zealand dollar be from a move to replacing monetary with fiscal stimulus.
In the case of Canada the effect was to strengthen the Canadian dollar, as it reduced the probabilities that the Bank of Canada (BOC) cutting interest rates any lower.
The first effect, therefore, of a move from monetary to fiscal stimulus would likely be a rise in the kiwi, given it would lower the probabilities of the RBNZ cutting rates any lower.
Lower rates hurt a currency so if they are unlikely to transpire the kiwi will probably rise.
“So while we can remain hopeful fiscal policy will do more heavy lifting around the globe and lessen the burden being carried by monetary policy (potentially taking pressure off the NZD), we’d be remiss to put all our eggs in that basket. Any such “swivel” will take time,” say ANZ
In addition to the strength the kiwi could get from taking the pressure of the RBNZ to further cut rates, it would also probably gain from the strong fundamentals in New Zealand.
The country’s economic growth rate is robust, housing is still on the rise creating wealth domestically and the country has a strong export sector.
Nevertheless, the shift away from monetary policy is already raising global yields with the 10-year treasury rising to 1.7% and German 10 year Bunds now also back above zero.
If the trend continues it will lessen inflows to the kiwi from the carry trade.
These have seen an increase lately due to a lack of investment opportunities globally as a result of negative yields.
They have kept the kiwi strong, however, if yields continue rising the carry trade may become less significant lowering capital inflows into New Zealand and ultimately weighing on the currency.
New Zealand Dollar Forecasts from ANZ
The NZD/USD is forecast at 0.71 in December, 0.69 in March 2017, 0.67 in June 2017 and 0.64 by end-2017.
The EUR/NZD is forecast at 1.07 in December where it should hover until December 2017 where it is expected to nudge to 1.06.
The GBP/NZD is forecast at 1.75 by December 2016, 1.79 by March 2017, 1.85 by June 2017 and by year end it will be at 2.08.