Currency Research

NZD Corporate FX Update

Jason Wong -
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- After being re-rated lower over the past few months, our projections show the NZD spending much of the year ahead flat around USD 0.68-0.70. In practice that means the occasional flourish into the low USD 0.70s, but relatively short-lived, and maybe a look at USD 0.66 sometime through the next year.

NZD/EUR: Downward trend intact

Jason Wong -
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- NZD/EUR has spent much of 2017 on a downward path and is currently down 12% year-to-date. But this move was from a very high level and the cross remains some 6% above our long-term purchasing power parity model estimate.
- The strong economic fundamental forces that have been in play over recent years and supported a rich NZD/EUR cross rate have been gradually unwinding. The ECB’s gradual move away from quantitative easing and expectations of an eventual removal of the negative deposit rate, are likely to drive EUR higher and be the key factors supporting further weakness in the cross.
- The model we introduced earlier this year still shows fair value heading steadily lower to EUR 0.54 when the ECB’s (shadow) policy rate reacheszero. The NZD/EUR downward trend still looks intact until we reach that sort of level. It would be prudent for corporates to take advantage of any short-term rallies to hedge positions in anticipation of further downside potential.

NZD vs. Long-Term Fair Value Estimates

Jason Wong -
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- Over the last 12 months, the NZD has depreciated against most major currencies, including significant falls against EUR, GBP, and CAD. This has closed up some of the long-term currency misalignment as measured by our purchasing power parity estimates.

- On a TWI basis, the NZD is currently very close to our long-term PPP estimate, supporting RBNZ Acting Governor Spencer’s recent statement that the NZD was “closer to a sustainable level”.

- Our PPP estimates have no bearing on our 1-2 year ahead projections for the NZD, which are driven more by cyclical factors and short term considerations, but they do play a role in thinking about the longer term outlook. Corporates with a long-term focus, say 3-5 years ahead, should budget for lower NZD/EUR, NZD/GBP, NZD/JPY and NZD/CAD cross rates. Over a long-term horizon, NZD/USD is more likely to be higher than lower, while there is no strong opinion on the current NZD/AUD long-term assessment.

NZD Corporate FX Update

Jason Wong -
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The NZ election outcome has hastened the expected move to below USD0.70. The NZD looks a little oversold from domestic political forces, against the backdrop of very high risk appetite and the supportive global economic backdrop. But a deteriorating dairy price outlook and chance that risk appetite falls from here curb any enthusiasm for a decent recovery. We see modest downside risk to our 0.69-0.70 flat line projection through to end-2018.

NZD shocked by new government

Jason Wong -
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- Some “sticker shock” to the formation of a new NZ government has seen a weaker NZD. While a near-term cloud overhangs the NZD from domestic political forces until we have more detail on policy and portfolios, we expect the negative impulse to quickly fade.

- In a long-term historical context, NZ’s real exchange rate is high, but this can be easily explained by NZ’s strong terms of trade. The call by some commentators that the NZD is over-valued in this context is a value judgment, but supporting evidence is scant.

- We re-estimate our short term NZD/USD model with new data and come out with unchanged conclusions. With fair value around 0.73, the NZD is a little oversold. But the softer GDT dairy auction this week reminded us why we have the NZD tracking towards 0.69-70 over the next 3-6 months. The hue of the government has no bearing on this, with global forces in charge.

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 -
Download PDF

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.