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One of New Zealand's most prominent banks says the New Zealand Dollar has likely passed its lows, and improved valuations for NZD sellers beckon over the coming months.

Auckland Savings Bank (ASB) says in a new research note the risks facing the New Zealand Dollar are now more balanced as the global outlook turns supportive amidst expectations for higher commodity prices and improving investor sentiment as central banks turn the corner on rate hikes.

"NZD still faces significant headwinds in the form of relatively low commodity prices and the anaemic China outlook. That said, the Kiwi may now be past its lows," says Nathaniel Keall, an economist at ASB.

At the time of writing, the New Zealand Dollar is the best-performing major currency on the day, taking support from firming global investor sentiment, which confirms the bigger picture remains a key driver of this currency:

Above: NZD outperforms its major peers on November 09. Set up a daily rate alert email to track your exchange rate OR set an alert for when your ideal exchange rate is triggered ➡ find out more.

But, if we zoom out, the Kiwi still screens as one of 2023's bigger underperformers, with only the Yen and Krone losing more ground:

Above: NZD performance in 2023.

To be sure, at the mid-year point, the NZ Dollar was at the bottom of the pile, confirming its relative performance has improved somewhat.

Indeed, the currency is well off the lows set against most of its major peers, with the Pound to New Zealand Dollar back at 2.0702, having been as high as 2.1585 at one point in August.

The Euro to Pound is at 1.8045, having been at 1.84. The New Zealand-U.S. Dollar rate has recovered to 0.5932, having been as low as 0.5773 as recently as October 26.

Underscoring the rebound is the sense that the major central banks have completed their rate hiking cycles; confidence that the U.S. Federal Reserve is now done was boosted by last Friday's below-consensus jobs report.

"Near-term NZD risks are a bit more balanced after last week," says Keall. "A breakthrough 0.5740 support threshold is now less likely."

ASB thinks NZD upside is likely to remain capped as 2023 closes, suggesting it is too soon to position for an all-out tear higher.

"NZD still faces significant headwinds in the form of relatively low commodity prices and the anaemic China outlook," says Keall. "That said, the Kiwi may now be past its lows barring a catalyst for a fresh deterioration in risk sentiment."

ASB says the Kiwi can move "cyclically higher" once again over 2024, helped by widening NZ-U.S. interest rate differentials, some further improvement in commodity prices and recovering global growth.

Notably, ASB forecasts imply the Federal Reserve can begin to move towards an easing bias earlier than the Reserve Bank of New Zealand (RBNZ), suggesting yield spreads will move in favour of the Kiwi in a more concerted fashion.

Gains against the European currencies are also anticipated.

"NZD can trend higher against EUR, JPY and GBP from early 2024 onwards for many of the same reasons as we expect it to lift against USD," says Keall.

ASB forecasts the New Zealand to Pound exchange rate at 0.49 by year-end, 0.50 by the end of the first quarter 2024, 0.51 by the end of the second quarter and 0.52 by the end of the third.

This gives a Pound to New Zealand Dollar forecast profile of 2.0408, 2.0, 1.96 and 1.9230.

The New Zealand to Euro forecast profile for these points in time are 0.56, 0.56, 0.56 and 0.55. This gives a Euro to Kiwi outlook of 1.7857 and 1.8181.

The New Zealand to U.S. Dollar exchange rate forecast profile is 0.60, 0.62, 0.64 and 0.66.