Corporate FX Strategy - NZD Corporate FX Update
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.
NZD Corporate FX Update
From the current NZD/USD level at a year-to-date high, we see the balance of risk weighed to the downside over the rest of the year. However, a return to a sub-0.70 level is contingent on the (over-sold) USD staging a recovery, after its steady broadly-based decline over recent months.
A Delay to Expected NZD/USD Weakness
- A pushing out of the expected recovery in the USD sees our near-term NZD/USD forecasts revised up, pushing out the expected fall in NZD/USD by a quarter. NZ’s terms of trade also look to be on a stronger path.
- Our end-Q3 NZD target is revised up a few cents to USD 0.71 and end-Q4 target nudged up a cent to USD 0.68. While the current NZD remains well below our short-term fair value estimate of around USD 0.75, there has been a wedge between actual and fair value all year. We aren’t expecting the NZD to rise much further over the near term. The gap is more likely to be closed by fair value nudging lower, than the NZD appreciating further.
The NZD’s recent strong appreciation from around USD 0.6865 just seven weeks ago has slowed as it approaches a key area of technical resistance around the 0.73 mark, a level it has yet to close above since February (using New York closes). After six consecutive weekly increases, the NZD could close this week down slightly.
NZD Corporate FX Update
- The strong recovery in the NZD against all the majors over the past month corrects the pricing anomaly seen earlier in the year. A period of consolidation is now due.
- Our projection for the NZD to head down to USD 0.67 over the next 3-6 months is contingent on a rebound in US inflation that keeps the Fed on course to normalise policy.
What a difference a month makes. After earlier puzzling over NZD weakness in the face of strong fundamentals such as high risk appetite and rising NZ commodity prices, the NZD has staged a strong recovery. It remains below our short term fair value model estimate of USD 0.75 but we aren’t banking on the NZD making further gains. The NZD is close to key technical resistance levels and we think some consolidation is now due.
NZD/AUD Finally Recovers; What Next?
- NZD/AUD recovered strongly by 4% in May, correcting the pricing anomaly we saw develop through March-April. Signs of a pothole in Australian growth and much stronger relative NZ/Australia commodity pricing goes some way towards driving the cross back towards a fairer value.
- Our medium-term outlook of an eventual move towards parity remains, based on the macro outlook continuing to favour NZ over Australia.
- After the strong recovery, the near-term outlook is now cloudier, but our central forecast is that a period of consolidation around the mid-90s should play out.
Our view on the NZD/AUD cross rate hasn’t changed, but given the big swing in that exchange rate this year, an update on drivers and thoughts seems appropriate. The cross began the year just over AUD 0.96, fell steeply from the end of January to mid-March to around AUD 0.91 and has since trended higher in a jumpy fashion to the current rate of just over AUD 0.95.