NZ Dollar Forecast to Suffer in 2015 for the Following Reasons

The New Zealand dollar (NZD) is predicted to decline against the British pound and US dollar in 2015. 

The kiwi has however enjoyed a strong start to the year against the pound, US dollar, euro and other G10 majors as China announces it is to fast-track $1.1trn of infrastructure spending.

Short-term drivers aside, what does the rest of the year hold for the New Zealand currency?

We hear from analysts at Danske Bank and other analysts that declines are likely.

First up though, here are the key NZD rates for your reference:

• The pound to NZ dollar exchange rate (GBP/NZD) is at 2.0057.
• The euro to NZ dollar exchange rate (EUR/NZD) is at 1.5190.
• The NZ dollar to US dollar rate (NZD/USD) is at 0.7545.

Note: If you are looking for a higher rate ask your FX provider to put the relevant buy and stop-loss orders in place to ensure you get the right rate when it is hit, find out more here.
Note 2: The above levels, and all rates quoted here, are from the inter-bank markets - your bank will affix a spread at their discretion when passing on a retail rate. However, an independent provider will seek to undercut your bank, thereby delivering up to 5% more FX in some instances. Please find out more.

Forecasts for the NZD

Danske Bank have advised their targets for the kiwi vs USD are set at 0.76, 0.75, 0.74 and 0.73 for the 1M, 3M, 6M and 12M timeframes respectively.

This confirms that the kiwi is looking richly priced at current levels, and the team at the RBNZ will remain uncomfortable with what they perceive to be an over-valued currency.

Any declines in the NZD/USD will also likely be felt in NZD/GBP as the US and UK are facing a generally similar interest rate profile at the present time.

Why Analysts are Predicting the NZD Will Fall

Kristoffer Kjær Lomholt at Danske Bank gives his reasoning for a NZD-Negative Bias:

"GDP figures for Q2 came out at 0.7% q/q. This was slightly stronger than expected and was primarily driven by the largest increase in the service industry since 2006.

"The New Zealand economy, however, still struggles with falling commodity prices. In particular, dairy product prices have fallen significantly in 2014, turning the trade balance surplus into a deficit.

"The general inflationary pressure has also eased significantly, primarily reflecting lower wage increases, falling 2Y inflation expectations and weak global inflation. Lastly, recent releases show that the housing market continues to cool with the lowest annual increase in house prices since April 2012.

"Monetary policy. As expected, the Reserve Bank of New Zealand (RBNZ) kept its official cash rate unchanged at 3.5% at the September meeting. The RBNZ emphasised that it is in ‘a period of monitoring and assessment before considering further policy adjustment’.

With inflation pressures easing, RBNZ does not have to raise rates immediately and can await the full effects of the commodity price falls and the four rate hikes in H1 14 on economic activity. Importantly, since the decision, RBNZ has revealed that it has returned to the FX market, actively trying to push the NZD lower from an ‘unjustified and unsustainable’ level.

"Flows. According to IMM data, non-commercial NZD positioning is now back in short territory albeit close to broadly square.

"Valuation. Fundamentally, NZD remains overvalued, with a Danske Bank PPP model estimate of about 0.69.

"Risks. NZD remains exposed to global risk sentiment. El Niño weather later this year could spell trouble for the economy.

Conclusion.

"The release of RBNZ FX reserve data has removed speculations that RBNZ will stick to verbal intervention alone and the possibility of further intervention is imminent.

"On the other hand, we expect RBNZ to leave the cash rate unchanged until Q1 15, when we believe that a combination of higher private consumption, business investments and construction works – partly driven by record high immigration – will force the RBNZ to hike again.

"Despite the consistent NZD sell-off experienced since July, we still believe that NZD/USD will gradually edge lower.

"Specifically, we expect commodity prices (i.e. dairy products), a slowdown in China and RBNZ intervention to weigh on the NZD leg.

"In this respect, it is noteworthy that non-commercial NZD positioning remains neutral allowing for more downside potential. In the short term, we may see some correction in the USD leg but, fundamentally, we still expect relative monetary policy and the USD’s role as an asset currency to pull NZD/USD lower."