ASB: New Zealand Dollar Weakness has Further to Run

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New Zealand bank ASB says the recent weakness in seen in the New Zealand Dollar has further to run.

"Recent weeks have seen a major underperformance of the NZD," says Nat Keall, Economist at ASB.

The New Zealand Dollar has over the course of the past month lost value to all its major peers, apart from the Norwegian Krone.

It has suffered losses of 7.70% against the Dollar over the month with losses of 1.0% coming against the Pound and 4.0% against the Euro.

Above: NZD performance over the course of the past month. Source: Pound Sterling Live.

"Woeful risk sentiment is the culprit," says Keall, "NZD is a ‘procyclical’ currency which means it tends to rise when there is optimism about the global outlook and fall when moods are more pessimistic."

The litany of headaches weighing on the New Zealand currency includes worries about a slowdown in China, ongoing uneasiness about the situation in Ukraine and angst about the US Federal Reserve teeing up some aggressive interest rate hikes.

"We suspect this story has a bit longer to run," says Keall.

"The current low level of the Kiwi is a wee bit out of proportion with the fundamentals and the currency will no doubt bounce back over time, but the near-term headlines will probably reenforce the prevailing mood," he adds.

An ongoing surge in U.S. inflation means further sizeable interest rate hikes are likely to be delivered by the U.S. Federal Reserve and ASB opines no clear indication China is willing to abandon its zero-Covid policy.

ASB notes however that the fall in the value of the Kiwi Dollar is proving a boon to the country's farmers and exporters.

"While the softening in the global outlook has crimped commodity prices, the weaker risk sentiment that results has offset much of the impact on farmgate returns via a lower NZD, such our NZD index has only come down about 4%. Sometimes a little anxiety isn’t all bad," says Keall.