New Zealand Dollar is Withering on the Vine but Analyst Says it is Still Overvalued

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The New Zealand Dollar fell Wednesday due to a combination of adverse factors, taking its 2018 loss near to the double-digits in percentage terms, but the currency is still overvalued according to one analyst. 

A strong U.S. Dollar, rising American bond yields and faltering global stock markets forced the New Zealand Dollar onto its back foot again Wednesday. 

Losses were compounded in the London session after Fonterra, the Kiwi dairy co-operative that manages much of the nation's trade in that sector, downgraded its forecast for farmgate milk prices this year.

Dairy goods are New Zealand's largest export so changes in prices can impact on the outlook for the Kiwi and Fonterra has now said this year's price will be between $6.25 and $6.50 per kgMS, down from $6.75 previously. 

Moreover, Fonterra says its advance payments to farmers will be based on a rate of $6.25 and that the final rate could be outside of the above range, suggesting it sees downside to Wednesday's forecast. 

"Demand for Whole Milk Powder, in particular, continues to grow in China, and it remains strong across South East Asia, but it simply isn’t matching current levels of supply," says Miles Hurrell, chief executive of Fonterra. 

The NZD/USD rate was quoted 0.29% lower at 0.6466 Tuesday, close to its lowest level since January 2016, while the Pound-to-New-Zealand-Dollar rate was up 0.47% at 2.0381.

It is not clear how much of Wednesday's loss was the result of the milk price data and how much owes itself to a deteriorating environment for so called risk assets, of which the Kiwi is one, and traders' generally downbeat view of the currency's future prospects. 

"CFTC is reporting record short NZD positions, not surprising when senior RBNZ officials have been advocating rate cuts since August," says Annette Beacher, chief Asia Pacific macro strategist at TD Securities. "USD gyrations, weak soft data and strong activity alternatively buffet the NZD but we see AUDNZD heading to 1.103 by Q1 2019...Our simple fair value model says NZD is still rich."

The New Zealand Dollar has now fallen close to 9% against the U.S. Dollar this year while the Brexit-stricken Pound has risen more than 7% against the Kiwi, but Beacher says it is still overvalued.

Those losses are thanks largely to Reserve Bank of New Zealand (RBNZ) interest rate policy and events in the offshore space. Other analysts are on record warning of further declines ahead for the currency.

Governor Adrian Orr has told markets repeatedly the RBNZ interest rate is likely to remain at a record low of 1.75% through 2019 and into 2020. Other RBNZ staff have said the odds of a rate cut have risen this year, prompting speculation of an actual cut being in the pipeline.

"Q2 expenditure GDP surged by +1.2%/q via private and public spending and a quarter-point from trade. Sept retail card spending surged by +1.1%/m such that Q3 spending was +2.2%/q, pointing to outsized real consumption growth, a strong start to Q3 GDP," Beacher writes in a recent note to clients. "The economy is in good shape, and the RBNZ needs to keep its powder dry ready for the next 'real' crisis, not mitigate business sector rebellion."

With interest rates elsewhere in the world now rising, this has left traders with little reason to hold the New Zealand Dollar at a time when it is under mounting pressure due to the effect President Donald Trump's trade war with China is having on so called risk assets like the Kiwi, Australian Dollar and global stocks.

New Zealand's Dollar is is underwritten by the nation's agricultural commodity trade with China and so it is sensitive to changes in sentiment toward the Chinese economy, which are heavily influenced by expectations for global growth.

Global stock markets have turned lower in the last week as rising U.S. interest rates and the President Trump's trade war with China finally make a dent in investors' optimism about the outlook for corporate earnings the world over.

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