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.
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NZD forecast update: Pausing for breath
The upward trend in NZD/USD stalled at the end of the first half of the year, with the currency reversing direction through July and raising a question-mark about whether the previous trend will resume. The chart below highlights this earlier upward trajectory (red line) and its subsequent loss of steam. Looking beyond initial optimism, the NZD has effectively been confined to a trading range between 0.5850 and 0.6120 since mid-April.
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NZD Corporate FX Update
The upward trend in NZD/USD in the first half of the year – driven by broad-based USD selling pressure – has been arrested, with some retracement through July so far.
The near-term outlook for FX markets is clouded by uncertainty on where US policy lands on tariffs. The previous 9-July deadline for implementing higher tariffs was delayed until 1-August. Not forgetting that early April was the original date for much higher tariffs, it wouldn’t surprise if further delays ensued.
Full Currency Research is available to BNZ Wholesale clients upon request, please email bnz_research@bnz.co.nz to subscribe.