BNZ have updated their forecasts for the NZ Dollar for 2017 in the wake of Donald Trump's victory in the US Presidential election.
The Trump’s election victory was a surprise for most foreign exchange analysts and we are starting to hear from various institutions as to how the victory will alter previously-held forecasts.
The team at BNZ note that their pre-Trump our projections embody a stronger USD outlook and at first glance, the Trump factor adds weight to that view.
Despite initially weakening in the minutes after Trump’s victory, the Dollar rebounded quickly as investors began to revise their view of Trump’s policies, especially his fiscal spending and import-negative protectionism as potentially dollar-positive.
In particular, BNZ note Trump’s policies on cutting corporation taxes and offering an onshoring incentive to attract externally-held USD deposits.
Trump has said he will offer a one month moratorium and single 10% repatriation tax fee on repatriations by companies who put money offshore to dodge tax.
BNZ estimate that out of the $2.4 trillion estimated profits held offshore, several hundreds of billions of dollars are probably held in alternative currency denominations, which will drive dollar demand when exchanged back on repatriation.
Trump’s Trade Policy a Risk to the Dollar
Whilst some analysts have seen Trump’s protectionism as a possible plus for the Dollar, BNZ take the opposite view and see it as a risk.
“Trade policy is the key concern regarding Trump’s agenda. We know of no countries that have gotten richer by putting up trade barriers so hopefully Trump’s suggested punitive 35-45% import tariffs on Mexico and China imports will never see the light of day,” said BNZ.
They see broadly one of two outcomes as resulting from Trump’s manifesto pledge to combat free trade.
The first is only a ‘tweaking’ of trade relations or ‘soft Trumpxit’ option, which will not impact on the Dollar fundamentally.
The second BNZ describe as an ‘overhauling’ of trade deals, which is the ‘Hard Trumpxit’ possibility, and would seriously undermine the economy and the Dollar.
“The circa 8-10% depreciation of the Mexican peso against the USD since Trump got the Republican nomination should give him pause for thought before hastily going down this trade policy path.
“One might say that the threat of such a policy has already increased the attractiveness of US factories relocating to Mexico, the opposite of what Trump desires,” commented BNZ.
The Outlook for Interest Rates and Monetary Policy
Donald Trump is not the only driver for the Dollar-New Zealand Dollar exchange rate, interest rates are, as always, a major driver too.
Investor money gravitates to countries with high interest rates where their capital can earn the biggest return.
The future of New Zealand interest rates, which are set by the RBNZ are therefore of tantamount importance to any discussion of the exchange rate.
BNZ note that whilst the RBNZ have said they will probably not cut rates any lower (their current rate is 1.75%), they also have not completely discounted the possibility of a further cut either.
“As anticipated, the cash rate was lowered to 1.75% from 2.00% but this was accompanied by a strong acknowledgement that further cuts are unlikely to be necessary. That said, the door has still been left ajar to further reduction with the Bank intimating a 20 to 25% potential for a further move lower.”
Risks which could tilt the RBNZ into another cut are as follows:
- A higher New Zealand dollar,
- higher funding costs,
- lower export prices,
- weaker commodities,
- lower inflation expectations,
Alternatively, higher immigration, rising house prices and higher consumption would tend to reduce the risk of another cut.
BNZ do not agree with the RBNZ’s view that the currency is overvalued, but they do support their argument, “that NZD will eventually drift lower, largely as a consequence of developments offshore rather than because of domestic factors.”
However, in particular they think the NZD will weaken as the Federal Reserve increases interest rates.
This is due to fact that at the moment the Kiwi is the currency with the highest interest rates in the G10 and therefore it is the ‘go-to’ currency for investors seeking yield.
If the US Dollar’s interest rates rise, and if USD rises with them, then that will make the Dollar a potentially more attractive vehicle for investor capital, diverging flows the NZD has got used to benefiting from for a long time.
BNZ also see more growth as coming from the Dairy Sector, and this preventing further interest rate cuts.
“Nonetheless, we reckon the RBNZ will get a get-out-of-jail- free card for any currency strength from the dairy sector,” adding:
“The current level of dairy prices to be unsustainable and still assumes that prices tend towards $3,000 tonne over the medium term. This may well be the case medium term but we think dairy will provide more stimulus to the economy over the next 12 to 18 months than the Bank has assumed.
“This will thus justify a stronger for longer currency,” concluded BNZ’s statement.
New Zealand Dollar Forecasts from BNZ for 2017
The NZD/USD pair is likely to continue rising to 0.72 by the end of 2016, from a current level of 0.7084; but then to fall back down to 0.67 by the end of 2017.
The New Zealand Dollar to Pound exchange rate is forecast at 0.5714 by the end of December, 0.5738 by the end of March, 0.5667 by June and 0.5776 by December 2017.
From a Pound to New Zealand Dollar perspective this equates to 1.75, 1.7427, 1.7646 and 1.73.
The New Zealand Dollar to Euro exchange rate is tipped to trade at 0.6429 by December 2016, 0.6364 by end-March 2017, 0.6239 by June and 0.6321 by December 2017.
From a Euro to NZ Dollar perspective this translates as 1.555, 1.57, 1.60 and 1.5820.