New Zealand Dollar Forecasts Lifted as Some Eye Short-term Correction

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- NZD forecasts lifted at MUFG after strong finish to 2019. 

- GBP/NZD seen declining in 2020 as NZD/USD advances.

- Risks are to the upside if RBNZ remains on the sidelines.

- But CIBC quantitative model sells NZD after closing 'long'.

- BofA Global Research buys EUR/NZD, eyes NZD correction.

- NZD most vulnerable of majors to fresh U.S.-Iran tensions.

New Zealand Dollar forecasts have been lifted at MUFG for 2020 after Kiwi rose by a near-double digit percentage in the final quarter of last year, although analysts at some other firms have told clients the antipodean unit is at risk of a downward correction in the weeks ahead. 

The Pound-to-New-Zealand-Dollar rate is now likely to decline in 2020 while the NZD/USD rate is set to rise in a reversal of the Kiwi's late 2019 fortune, which had envisaged declines for the NZD/USD pair and a notable gain for Sterling this year. That's according to the latest forecasts from MUFG, the world's fifth largest lender as measured by S&P Global Market Intelligence. 

Driving the forecast change is the strong 8.9% increase seen in the NZD/USD rate between the beginning of October and end of December, as well as a series of upside surprises in Kiwi economic figures. Third-quarter GDP growth was stronger than both the market and Reserve Bank of New Zealand (RBNZ) had envisaged while households also appear to have stepped up their borrowing and spending in the wake of the central bank's three 2019 interest rate cuts.

"Consumer confidence also increased – the index increased in December and is now above the long-term average," says Derek Halpenny, head of research, global markets EMEA and international securities at MUFG. "The run of data has certainly given us less confidence in our view that the RBNZ would cut rates again. The markets removed about 30bps of easing from the curve for this year in Q4 and we now see upside risks to our subdued NZD forecast profile."

Above: Pound-to-New-Zealand-Dollar rate shown at daily intervals.

It wasn't just the economy that grew faster than expected of late because the government's spending plans have too. The Labour-led coalition's first 'Wellbeing Budget' saw it promise in December, an additional $12 bn of investment that it says will add a substantial $10 bn to GDP over five years. 

Faster growth, plans for higher government spending and the 'phase one deal' first announced on October 11 by the U.S. and China all helped fuel a turnaround in market expectations for interest rates in New Zealand which boosted the currency heading into year-end. 

Pricing in the overnight-index-swap market had implied a May 13, RBNZ cash rate of just 0.50% just days before the deal with China was announced, which was exactly half the current 1% cash rate and suggested investors were convinced the bank would cut rates twice more before then.

However, the implied rate for May was seen at 0.90% early in the European session Tuesday. After being crushed by an increasingly sour outlook for rates in recent years, as well as many other factors, the Kiwi could draw substantial support in 2020 from a brighter outlook for both rates and growth. 

Above: NZD/USD rate shown at daily intervals.

"A final factor suggesting upside NZD risks was the decision of the government to add fiscal stimulus in its budget update in December. These factors have led us to raise modestly our NZD forecast profile with risks the RBNZ may remain on the sidelines," Halpenny says. 

MUFG forecasts that Kiwi strength will push the Pound-to-New-Zealand-Dollar rate down from 1.9758 Tuesday to around 1.9661 by year-end, while the NZD/USD rate is seen rising from 0.6644 to 0.68 by the time the curtain closes on 2020. Those forecasts are adjusted from 2.0153 and 0.6500 respectively. 

The Kiwi's fortune may have turned for the better in recent months but some are betting the New Zealand currency will see a downward correction in the weeks ahead. CIBC Capital Markets is one of those firms. 

"Our model is going short NZD/USD targeting 0.6569 over the next couple of weeks. Recent appreciation in the currency has pushed the z-score to 2.4, which we consider extreme," says Sarah Ying, a director of fixed income, currency and commodity strategy at CIBC. "Currencies where the z-score magnitude exceeds the optimal z-score threshold have greater likelihood of convergence to model fair value, and are marked as Strongly Mean-Reverting."

CIBC's "rules-based" quantitative model, which has a 60.3% strike rate, has flagged the NZD/USD rate as a sell just days after the FX strategy team told clients to close out an earlier wager that the exchange rate would rise. The trade was entered at 0.6672 on Monday. 

Above: EUR/NZD rate shown at daily intervals.

Canada's CIBC is not alone in anticipating at least a temporary reversal of the Kiwi's recent good fortune because technical strategists at BofA Global Research also advocated betting against the New Zealand currency this week, although they prefer to buy the Euro instead of the U.S. Dollar. 

"A TD Setup buy signal occurred ending January 3. Such a signal implies the sharp selloff in December is set to bounce for the next few weeks. A bullish bias can remain while above the July 2019 low of 1.6527 or the 200wk SMA at 1.6458. It is unclear if a breakout above the declining trend line will occur however this is a point to debate it," writes BofA's Paul Ciana in a research note, referring to the EUR/NZD rate. 

New Zealand's Dollar put in a strong performance at the end of 2019 but it's close to the bottom of the major currency bucket for 2020, in part due to its commodity exposure and a January increase in tensions between the U.S. and Iran that's seen investors eschew so-called risk assets and currencies. And some local analysts say the Kiwi could remain an underperformer if markets continue to fret over the possibility of a U.S. confrontation with Iran in the Gulf. 

"AUD will likely outperform NZD in this unfavourable geopolitical environment," says Joseph Capurso at Commonwealth Bank of Australia in a Monday note to clients. "In Q3 2019, Australia recorded a current account surplus of 1.3% of GDP and New Zealand a deficit of 3.3% of GDP.  This means New Zealand remains dependent on foreign savings to finance domestic investment.  As such, NZD will need to trade at a discount to keep attracting foreign capital in the event appetite for risk worsens."

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