NZD Corporate FX Update
We remain cautious on the NZD through Q2, but see prospects for a sustained recovery from the second half of the year, extending into next year.
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NZD Recovers In April
• Reduced growth in cases and deaths from COVID-19 sees risk assets recover strongly in April after their beating in March
• AUD outperforms strongly, seeing NZD/AUD weaker, but NZD/USD recovers 3%
• NZ rates fall to record lows with the RBNZ in charge of the market
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NZD/AUD: Macro Headwinds
We see the fall in NZD/AUD over the past few weeks as justified, post the overshoot to parity.
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NZD Chartbook April 2020
• We have high conviction that the NZD can recover from the second half of the year and into 2021 as the spread of COVID-19 is brought under control.
• We remain comfortable projecting the NZD up sustainably through USD0.60 in 2H20 and stretching up to the mid-60s within 12-months.
• But we have low conviction on the next 1-2 months, where a retest of the 19 March low of USD0.5470 still can’t be ruled out.
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NZD: How low can it go?
After highlighting the downside risks to the NZD in recent reports, the time has come for our forecasts to play catch-up. The central view presented makes the heroic assumption of success in containing COVID-19 over coming months.
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NZD faces further downside risk
In our currency research note of 5 March, “NZD behaviour in a global recession”, we outlined that global recessions were highly negative for the NZD. We noted that on loose figures, the full-on global recession scenario playing out could see NZD/USD fall to the high-0.50s, NZD/EUR into the low-0.50s, NZD/GBP around the mid-0.40s and NZD/JPY into the low-60s, while we weren’t inclined to change our NZD/AUD target of 0.94 in that scenario
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NZD behaviour in a global recession
The NZD has been hit hard as COVID-19 has spread, dealing an economic blow to the global economy. While it’s hard to be certain, we’d see the NZD at around 0.63 as consistent with a mild global recession scenario playing out.
In a deeper recession scenario – the risk of which was spelt out in the OECD interim economic update this week – we’d see further downward pressure on the NZD.
On loose figures, the full-on global recession scenario playing out could see NZD/USD fall to the high-0.50s, NZD/EUR into the low-0.50s, NZD/GBP around the mid-0.40s and NZD/JPY into the low-60s. We wouldn’t be inclined to change our NZD/AUD target of 0.94.
Exporters and importers need to tread carefully in this environment, with an eye on potential demand for goods and services as well as currency levels to hedge at.
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