New Zealand Dollar to Enjoy a Boost as Sellers Cash Up but Weakness Will Return says Westpac

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- NZD extends rebound due to "position squaring" say Westpac.

- Bounce has legs to go further but weakness to return before long.

- A pickup in economic growth, inflation, required for lasting gains.

The New Zealand Dollar outlook remains dire over a medium-term horizon but the Kiwi is likely to enjoy a continued rebound over coming weeks as sellers cash up and walk away from earlier trades, according to analysts at Westpac. 

New Zealand's Dollar rose by more than 1% last week as other so called risk assets, such as stock markets, rebounded from earlier losses. Analysts said at the time the move was likely driven by "position squaring" and more have since come out to say the pop higher by the Kiwi unit has further to run. 

"The immediate outlook for NZD/USD is unclear, with the impact of this week’s strong NZ CPI data offset by the US dollar’s recent rebound. Given extreme short positioning, though, there remains upside potential towards 0.6725 over the next few weeks," says Inre Speizer, an Auckland-based currency strategist at Westpac. 

Financial institutions bet record amounts against the New Zealand Dollar in the week ending October 16, while better-than-expected inflation data released on that day may have been the catalyst that sparked the ongoing rebound. 

New Zealand's Dollar has been blighted by a duo of headwinds in 2018, beginning with disappointmenting inflation and growth data that has driven a deterioration of the Kiwi interest rate outlook, and more recently an escalation of the so called trade war between the U.S. and China.

The inflation and growth outlook has been become so tepid the Reserve Bank of New Zealand (RBNZ) begun warning in July that it could cut interest rates over coming quarters if the economy does not pick up sufficiently to support a return of the consumer price index toward the upper end of the 1% to 3% target band.

Coming amid President Donald Trump's trade war with New Zealand's largest customer for its chief exports of agricultural goods, China, speculators have bet heavily against the Kiwi Dollar in 2018. So much so that the amount of money now stacked against the Kiwi is close to a record high.

"NZ economic activity has been solid and broad-based since mid-2018. However, there’s probably not enough evidence yet to warrant an RBNZ shift in stance from an easing bias to a neutral one at its November MPS. Q3 GDP (out in Dec) and Q4 CPI may do the trick, but for that we’ll have to wait until the Feb 2019 MPS," Speizer adds. 

New Zealand's inflation rate has been below the midpoint of the 1% to 3% target band for most of the time since 2012, neccesitating a "loose" monetary policy from the RBNZ. The central bank has now kept its interest rate at a record low of 1.75% for almost two years. 

Rates have been kept at ultra low levels in New Zealand despite that other central banks have been raising their benchmarks for some time now, creating an incentive for international investors to shun the Kiwi and buy other assets such as U.S. bonds instead. This has seen the NZD/USD rate decline 7% in 2018 so far. 

In order for the interest rate, as well as New Zealand Dollar, outlook to improve inflation will need to rise back within the upper end of the target band. This requires a pickup in economic growth, which may well be underway already, but markets will not know how the economy has performed in the third-quarter until year-end or after. 

This means beyond the "position squaring" bounce in the Kiwi over coming weeks, the currency could remain depressed until well into the 2019 year. Speizer says there are more losses lurking along the road ahead for the New Zealand Dollar. 

"Medium term, we remain bearish, based on our Fed/US economy-based expectation that the USD will rise further, and we continue to target 0.64 or below by year end," the strategist writes, in a note to clients Monday. 

National Australia Bank (NAB) analysts said last week that the NZD/USD rate will fall back to 0.65 in time for year-end but that it will rise to 0.698 over the course of 2019. They predict the Pound-to-Kiwi rate will fall to 1.96 by the end of 2018 before rising back to 2.02 during 2019.

Analysts at J.P. Morgan also warned earlier in October that the NZD/USD rate is in danger of falling to 0.6450 or below during coming months. 

"It remains likely that key-supports at 0.7030 in AUD/USD and at 0.6450 in NZD/USD are broken, which would give room to challenge old lows from 2016/2015 at 0.6827 (AUD/USD) and at 0.6236 (NZD/USD)," says Thomas Anthonj, a techincal strategist, in a note to clients.

The NZD/USD rate was quoted 0.03% higher at 0.6578 Monday, after having recovered from multi-year lows earlier in October, while the Pound-to-New-Zealand-Dollar rate was up 0.13% at 1.9805.

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