New Zealand dollar outlook: NZ Dollar may have seen end of gains vs Australian dollar warn UBS
- Written by: Gary Howes
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The outlook for the NZ dollar (NZD) is dominated by the interest rate decision due out of the Reserve Bank of New Zealand at 8PM GMT.
Markets are in agreement that the case for a rate hike in New Zealand in the coming weeks seems compelling:
- CPI is moving back to target and rising fast;
- business confidence is running high;
- the terms of trade are still elevated.
- House prices continue to boom, despite cooling measures introduced in October – "and when the complementary medicine fails, it’s time to reach for the antibiotics," says Gareth Berry at UBS.
Ahead of the interest rate decision we see the following NZ exchange rates:
- The pound sterling to New Zealand dollar exchange rate (GBP-NZD) is 0.07 pct higher at 2.0024.
- The euro to New Zealand dollar exchange rate (EUR-NZD) is 0.36 pct lower at 1.6503.
- The New Zealand dollar to US dollar rate (NZD-USD) is 0.36 pct higher at 0.8289.
- The Australian to New Zealand dollar exchange rate (AUD-NZD) is 0.37 pct higher at 1.0596.
Be Aware: All NZD quotes are taken from the wholesale inter-bank markets. Your bank will charge a spread on the rate they deliver to you at their discretion. However, an independent FX provider will guarantee to undercut your bank's offer, thus delivering more currency. Please learn more here.
It is worth noting though that consensus estimates don't see today as being the day a rate cut will be delivered.
Berry says the issue of an interest rate hike in New Zealand is a certainty in 2014; the only question regards timing.
"The RBNZ is not expected to change interest rates but they will be preparing the markets for a rate hike in very near future," says Kathy Lien at BK Asset Management.
Outlook favours the New Zealand dollar
Even though the Chinese and Australian economies have weakened, New Zealand has stayed buoyant. "For this reason, we expect the New Zealand dollar to extend higher on the back of the RBNZ announcement," says Lien.
Regarding the near-term outlook for the NZ dollar, Citigroup say:
"NZD rose yesterday on renewed risk appetite as CBT raised rates much higher than the expectation.
"Due to the strong economy and rising inflation rate in NZ, Citi analysts expect the RBNZ may raise rate at tomorrow’s meeting. This will likely be NZD-supportive.
"Technically, NZD/USD may test higher to 0.8432, with support at 0.8162-0.8198."
Outlook for the Aus vs NZ dollar: No downside to come
Berry reckons those betting on further declines in the Australian to New Zealand dollar exchange rate could be disappointed:
"Having dropped 20% over the past 18m, we doubt AUDNZD has much more downside left to come.
"A series of quick-fire hikes this year (5 x 25bp) are already priced in, consistent with RBNZ guidance to date. For AUDNZD to hit parity on policy settings alone, the RBNZ would likely need to hike sooner and even more aggressively than already signalled. The latter, at least, presents a very high hurdle."
Australian dollar benefits from good NAB sentiment reading
Turning to the Aus dollar, we see The Australian dollar on the other hand benefitted from stronger business confidence. The NAB index rose from 5 to 6, which was surprising given the recent deterioration in economic data.
According to the NAB, "the increasing slack in the labour market and limited signs of a turnaround in real activity indicators - in light of the looming declines in mining investment - suggests these improvements may be fleeting, although higher building approvals and recent signs of life in the retail sector are encouraging."
If the RBNZ is hawkish, AUD/NZD could drop to fresh lows says Lien.
US FOMC decision ahead, markets trade higher
Unusually before an FOMC statement, European equities are rising sharply higher. The normal sitting on the sidelines won’t be happening today but not because of some rumour or off the cuff remark from a Fed member.
Instead, Turkey’s attempt to quash its own currency troubles by hiking interest rates by 4.25% overnight seems to have steadied the recent fears of an emerging market rout.
Asian markets and index futures have all reacted positively and the surge in positive sentiment is expected to still be in tact when it hits European shores.
"Whether other emerging markets follow suit or the optimism can survive another expected $10billion of tapering tonight is another question, but for now fears that an emerging market collapse would drag western economies down seemed to have subsided," says Jonathan Sudaria at Capital Spreads.
