The New Zealand Dollar Draws Buyers after Economy Surprises on the Upside in Third-quarter

Above: RBNZ Governor Adrian Orr. File Image © Pound Sterling, Still Courtesy of Financial Services Council NZ

- NZD draws interest after economy surprises on upside in Q3.

- But data comes with downward revisions to earlier numbers.

- CBA says RBNZ will cut rates again but sees support for NZD.

- Westpac scraps rate cut forecast and says buy NZD on dips.

- Tips "corrective pullback" before NZD/USD climbs to 0.68.

- But NZD splutters Thursday after 2 months of solid gains.

The New Zealand Dollar was on its back foot Thursday but is being tipped to rise against the U.S. Dollar in the months ahead as the global growth outlook stabilises and an uptick in the Kiwi economy enables the Reserve Bank of New Zealand (RBNZ) to avoid further interest rate cuts in the first half of 2020. 

New Zealand's Dollar softened against its U.S. rival Thursday and was up against Sterling after data revealed overnight that Kiwi growth was faster than markets had anticipated during the third-quarter.

GDP growth came in at 0.7% for the third quarter when markets were looking for only a 0.5% expansion although markets didn't celebrate the performance for long because included in Thursday's data was a steep downward revision to Statistics New Zealand's initial estimate of growth in the prior period.

Second quarter GDP growth was initially reported as 0.5% but that number was revised down to just 0.1% meaning that, even after the 0.2% beat against the consensus on Thursday, the Kiwi economy has still underperformed market expectations in recent months. 

"Growth was supported by very strong spending in retail trade and an out‑sized increase in telecommunications services. Disappointingly, Q2 GDP growth was revised down sharply," says Elias Haddad, a strategist at Commonwealth Bank of Australia. "Our ASB colleagues continue to expect the RBNZ to cut its official cash rate by 25bps to 0.75% in May 2020 in large part due to tightening credit conditions creating headwinds to a recovery in GDP growth." 

Above: Pound-to-Kiwi rate shown at hourly intervals.

The downgrade to the second quarter number came as markets were looking for the data to justify a steep 6.9% increase in the NZD/USD rate since around the beginning of October when RBNZ Governor Adrian Orr first hinted at a possible pause in the bank's cycle of interest rate cuts. The RBNZ has slashed Kiwi borrowing costs three times, taking the cash rate down from 1.75% to 1%, this year in an effort to lift New Zealand economic growth and inflation. 

Orr's comments had given way to a slow and steady repricing of expectations for the RBNZ cash rate into year-end and through 2020. At the end of the September the overnight-index-swap implied cash rate for May 13, 2020 was just 0.62%, far enough below the current 1% level to imply that another 25 basis point rate cut was certain to come before then. But by Thursday that implied rate had risen back to 0.92%, only fraction beneath the current cash rate. 

Haddad and the CBA team are still forecasting another RBNZ rate cut in May 2020 which will be sure to weigh on the Kiwi in advance if the broader market comes back around to that view any time soon although the Aussie lender says the anticipated cut will have more to do with the RBNZ having to counter the adverse effect on lending to the real economy that's expected to result from its recent decision to raise the amount capital that Kiwi banks must keep in reserve on their balance sheets. 

"At current levels, NZD/USD is technically stretched and needs a corrective pullback near term before extending the rally which started in early October," says Richard Franulovich, head of FX strategy at Westpac.

Above: NZD/USD rate shown at hourly intervals.

CBA's Haddad says that expectations of more rate cuts from the RBNZ will act as a "major headwind" that limits future gains for the Kiwi currency but he also forecasts the NZD/USD rate will "sustain a move above 0.66" in the weeks ahead because downside risks to the global growth outlook have been diminishing since President Donald Trump and Chinese Vice Premier Liu He said in October they'd reached a 'phase one deal' to temporily end the trade war between the U.S. and China. 

CBA forecasts the NZD/USD rate will end the 2019 year around its current 0.65 level before rising to a peak of 0.67 by the end of March 2020 but Franulovich and the Westpac team have an even more bullish view than that.

They told clients Thursday to buy the NZD/USD rate on any dip back to 0.64 and to target a move up to 0.68 in the coming months. 

"The NZ economy is expected to continue to improve over the next six months, with the housing market a notable contributor. The RBNZ is likely to remain on hold over that period. In contrast, an expected US slowdown from early 2020 should cause the Fed to cut its policy rate three times in 2020. The resultant increase in NZ-US yield spreads should lift NZD/USD," Franulovich says.  

Above: NZD/USD rate shown at daily intervals.

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