Currency Research

NZD: Rates a secondary force only

Jason Wong -
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- Central bank statements and expectations can kick around currencies over the very short term but we think other drivers are more important over the medium-term. Relationships between NZ-global rate spreads and the NZD have weakened over recent years.

- Risk appetite and commodity price trends are more important drivers of the NZD than interest rate differentials. Our monetary policy expectations don't have a significant bearing on our outlook for the NZD over the next year or two.

- High risk appetite - its highest level this year - supports the current level of the NZD. Our projections for a weaker NZD into year end and early next year assume that eventually risk appetite must surely fall from its giddy heights. A weaker commodity price dynamic is expected to give further weight to that view.

NZD Corporate FX Update

Jason Wong -
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The risk-loving environment provides near-term support for the NZD but our forecasts are predicated on this dynamic not lasting forever. A further Fed hike in December remains in our forecast, which supports a modest recovery in the USD and nudges the NZD down to 0.70 by year-end. The NZD is then projected to hover around that level through 2018.

NZD Corporate FX Update

Jason Wong -
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The risk-loving environment provides near-term support for the NZD but our forecasts are predicated on this dynamic not lasting forever. A further Fed hike in December remains in our forecast, which supports a modest recovery in the USD and nudges the NZD down to 0.70 by year-end. The NZD is then projected to hover around that level through 2018.

NZD/AUD: A deserved fall on fundamentals

Jason Wong -
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NZD/AUD has fallen alongside our short term model estimate, given the recent strong outperformance of Australian commodity prices (metals surging ahead) and the toning down of NZ rate hike expectations.

This fundamental shift needs to be respected, and our NZD/AUD projections have been downgraded accordingly alongside a material upgrade to NAB's AUD forecasts. Our short term FV model estimate, which can get kicked around by commodity prices, has fallen to 0.9170.

We now see, broadly speaking, a 0.91-0.95 range for the cross through to the end of next year, with the higher end more likely prevailing later in the period. The near-term threat is a breach of 0.91 if metal prices continue to rally, alongside a possible knee-jerk reaction to any NZ political uncertainty.

Corporate FX Strategy - NZD Corporate FX Update

Jason Wong -
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After a strong run through to the end of July, the NZD has significantly underperformed, driven by a confluence of factors. Net speculative positioning has been and remains net long NZD at elevated levels, setting the scene for a contrarian move downward. NZ commodity prices have softened over recent weeks. Soft inflation data have supported the RBNZ’s policy stance to keep rates low for an extended period. Risk appetite has fallen on increased US-North Korea political tensions. And the NZ election race has become a closer call after a change in leadership from the main Opposition party, adding a measure of uncertainty to the outlook.