Wings clipped on Kiwi
Global and domestic forces have driven the NZD down to fresh lows, demanding a revision to our projections. We pare back the extent of projected US dollar decline against all the majors, while NZD crosses include the impact of the now well-acknowledged disappointing recent NZ macro performance.
Our new year-end target for NZD/USD is 0.59. From a current depressed level, we still see a clear pathway for a positive medium-term trajectory, although next year’s target has been cut to 0.63.
Full Currency Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.
NZD/AUD: Crikey mate, check this out
The NZD/AUD cross rate has been plunging of late, driven down by collapsing NZ-Australia rate spreads. Earlier this year we noted our short/medium-term model estimates were sitting around 0.85. Those model estimates now sit around 0.83-0.84. Based on fundamental forces, the recent plunge in the cross rate to below 0.88 has been fully justified.
Risks to the outlook are two-sided. There are strong reasons for the cross rate to trade lower, including downside momentum, lower fair value estimates, and the likelihood of RBNZ rate cuts. Risks remain that the cross rate could break decade-lows, with little technical support below 0.87.
However, a potential recovery could come if the RBNZ is less aggressive with cuts and forthcoming NZ data improves. While downside risks to forecasts exist, longer-term investors may see value at current levels. Based on the negative interest rate spread between NZ and Australia being sustained, the near-term headwinds for the cross rate remain formidable.
Full Currency Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.