New Zealand Forecasts "Nudged Up" at Leading Investment Bank

- NZD is best performer of past month
- Goldman Sachs lift forecasts
- But Westpac says NZD now looking overvalued

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Foreign exchange analysts at investment bank Goldman Sachs have this week said they are raising their forecast targets for the New Zealand Dollar, while Australia- and New Zealand-based lender Westpac say they see the near-term rally in the currency extending.

The calls come as the New Zealand Dollar outperforms its peers, driven higher by a rerating amongst investors of the global economic outlook following the November announcements of three successful vaccine candidates.

The New Zealand Dollar is the best-performing major currency of the past month and has advanced 4.27% against the U.S. Dollar, 2.30% against the Australian Dollar, 2.0% against the Pound and 1.85% gains the Euro.

In an annual currency forecast briefing Goldman Sachs say the NZ dollar will likely outperform the Aussie dollar in the year ahead as improving domestic and global growth resulting in a pricing-out of Reserve Bank of New Zealand (RBNZ) interest rate cuts.

This week sees the investment bank go further and advise they are "nudging up near-term forecasts on less-dovish RBNZ."

The New Zealand dollar underperformed major peers in the mid-year period as the RBNZ cut interest rates and prepared the markets for further cuts in 2021 that would take the basic lending rate (the OCR) below 0%.

However, the domestic economy's relative outperformance and a broader global economic recovery, as well as rising house prices in New Zealand, have lead the RBNZ to row back on this view.

The multiple supportive drivers have since propelled the New Zealand Dollar higher.

"In addition to positive vaccine developments, the move reflected comments from the RBNZ that appeared to put more caveats around the prospects for further easing (“as needed”), and news that the New Zealand government may add house price stability to the central bank’s remit," says Zach Pandl, an economist at Goldman Sachs.

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Goldman Sachs have 'nudged up' the three month and six month New Zealand dollar-U.S. sollar forecasts to 0.71 and 0.72 respectively, up from 0.69 and 0.71 previously.

The 12 month forecast target is held at 0.74.

Using the bank's GBP/USD forecasts, we can arrive at the pound-to-New Zealand dollar forecasts which are ~1.8873, ~1.91 and ~1.94.

Foreign exchange analysts at Westpac are also backing further strength in the New Zealand dollar in the short-term saying the RBNZ's about-turn on interest rates can continue to deliver gains for the currency, although the currency is starting to look expensive.

"NZD outperformance is grounded in a surging housing market and stronger than expected growth, prompting a dramatic RBNZ about-face on further easing," says Richard Franulovich, a foreign exchange analyst with Westpac in Sydney.

The trend in retreating expectations for further rate cuts at the central bank still has further to run says Franulovich, "underscoring the potential for a major policy driven rally in NZD".

However, the rally will have potential limits as the currency is now looking expensive (see above) and the RBNZ is still expected by Westpac to cut interest rates.

"We continue to expect OCR cuts, from April 2021 onwards, but any hints from the RBNZ on that front are unlikely to appear before February. That means the NZD could remain elevated until then," says Franulovich.

Westpac analysis shows that momentum in the NZD/USD exchange rate remains positive and the next major technical target is 0.7000.

But beyond here the rally will start looking technically stretched.