King dollar crushes kiwi
• We are lifting our USD forecasts across the majors, reflecting stronger US economic momentum, stickier inflation and the Fed’s recent hawkish shift. While stretched long-USD positioning leaves the dollar vulnerable to softer data, we expect much of the recent USD strength to be sustained.
• We have lowered our NZD/USD forecast, with the previous 0.63 year-end target now looking too ambitious. We now target 0.59 by year-end and expect NZD/USD to remain broadly range-bound around 0.56-0.60 over the coming quarter.
• NZD upside is likely to be capped by low relative NZ interest rates, RBNZ timing uncertainty and election risk, even though the currency is already at historically depressed levels. Revisions to NZD cross forecasts are mixed but mostly modest, with relative central-bank policy paths remaining the key swing factor.
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NZD/AUD: Has the turning point been reached?
In our regular reports, we have been musing whether the turning point in the NZD/AUD cross rate has been reached. Lower NZ-Australia rate spreads, particularly over the past year, have been a key driver of the cross rate falling to a 13-year low of just below 0.8140 in late-May.
The RBNZ’s policy message in the May MPS increased confidence that the Bank was about to embark on a significant tightening cycle, at a time when the RBA’s mini-tightening cycle was likely close to complete. A few months ago, the market began to push NZ-Australia 2-year swap rate spreads modestly higher in anticipation of this evolving monetary policy outlook.
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NZD Corporate FX Update
The war in the Middle East remains a key driver of currency markets. Since the early-April ceasefire, the NZD has been stuck in an approximate 0.58-0.60 range, during a period in which the US and Iran have reached a stalemate over a peace deal and, critically, the reopening of the Strait of Hormuz.
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Risk appetite recovery in April, despite the war
• Risk assets bounced back in April following the US-Iran ceasefire, despite lingering uncertainty about when the conflict will end.
• Strong gains in global equities; bond market still fearful of the inflationary impact of higher oil prices.
• NZD/USD up nearly 3%, after the more than 4% plunge in March; mixed movement on NZD crosses
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