New Zealand Dollar Forecast Lower Against US Dollar, Higher Against the Pound in BNZ's Latest Corporate FX Briefing
BNZ have told corporate clients that the New Zealand Dollar should gradually decline against the US Dollar but should strengthen to fresh all-time highs against the British Pound.
- GBP/NZD could go below 1.66
- NZD/USD projected to endure 'mild' depreciation through 2017
The US Dollar side of the NZD/USD pair is set to gain as bets increase that the Federal Reserve will raise interest rates by December.
Furthermore, analysts at BNZ suggest that the market is underestimating the scale of interest rate increases from the Fed over the course of 2017.
“Our core view remains that the market is complacent about the outlook for US monetary policy, with only circa 40bps (0.40%) of hikes priced in through to the end of next year, compared to our expectation of 75bps (0.75%) of hikes," say BNZ in a briefing to corporate clients.
“This sets the scene for a stronger USD profile through the next year, which is negative for risk appetite and the NZD."
BNZ see NZD/USD falling to a low of 0.67 by December 2017 before recovering to 0.71 by June 2019:
The Kiwi’s decline will be offset, however, by a strong NZ domestic economy.
“The NZ economy is growing above trend, NZ’s terms of trade are rising, NZ’s external accounts remain in a better-than-average state and the strong fiscal position provides scope for stimulus ahead of, and beyond, the late-2017 general election,” says BNZ’s Head of Research Stephen Toplis.
The Kiwi should further be supported by the fact that falling inflation has bottomed out, and is even ticking higher, although still “ensconced in the bottom half of the range”.
This will lessen the pressure on the Reserve Bank of New Zealand (RBNZ) to cut interest rates although BNZ still see one probable further cut by the central bank in November.
On the not too distant horizon, there may also be signs of the start of a tightening cycle, in which the RBNZ will start to raise interest rates.
For all of the rest of 2017 and most of 2018 New Zealand will continue to enjoy high interest rates for the G10, with a 2.0% base rate set by the RBNZ – which compares favourably to the Fed’s 0.50%.
Generally, the rule is that the higher the interest rate the stronger the currency since high interest attracts inflows of foreign capital seeking returns.
“Our projections reflect a battle between negative global forces and positive domestic forces, with the net result being a modestly depreciating NZD path,” concludes Toplis.
There is no significant mismatch between short or long-term valuation models for NZD, which calculate a ‘fair value’ for the currency, and BNZ’s estimated path.
BNZ’s Purchasing Power Parity (PPP) model, which is based on the theory that the exchange rate should discount to an exchange rate which exactly matches two identical baskets of items in two currency jurisdictions suggests a fair value for NZD/USD of 0.70, which is about the same as the forecast.
Pound to New Zealand Dollar: Could go Below 1.66
BNZ’s Toplis is less bearish about the Kiwi versus the Pound, due to Sterling’s bearishly voguish outlook.
“GBP has fallen significantly since the Brexit referendum and looks very cheap amongst global currencies, but we’re not convinced that it has fallen by enough.”
Whilst UK data out since the referendum has been surprisingly positive this is not expected to last forever, and Toplis expects data to eventually take a turn for the weaker, reflecting the uncertainty and economic fallout from Brexit.
“A “hard Brexit” has become more likely and the economy faces a prolonged period of economic uncertainty, which should lead to a slump in business investment.
“In the meantime, a large current account deficit needs to be funded.
“It points to further upside pressure in NZD/GBP over time and a risk of breaking GBP 0.60," concludes the senior analyst.
0.60 in GBP/NZD terms is 1.66.
BNZ are forecasting NZD/GBP to trade at 0.57 by December, 0.57 by March 2017 and this level should be maintained through to 0.58 in December.
From a GBP into NZD perspective, 0.57 = 1.7543 and 0.58 = 1.7241.
Latest Pound / New Zealand Dollar Exchange Rates
  | Live: 2.3089▼ -0.16%12 Month Best:2.3553 |
*Your Bank's Retail Rate
| 2.2304 - 2.2397 |
**Independent Specialist | 2.2766 - 2.2858 Find out why this is a better rate |
* Bank rates according to latest IMTI data.
** RationalFX dealing desk quotation.
