NZ Dollar Forecast: 'Unjustified and Unsustainable' Exchange Rate Levels to Prompt More RBNZ Action

The NZ dollar exchange rate complex (NZD) is forecast to maintain a fragile bias amidst fears that the country's central bank may hammer the currency lower once again.

The Kiwi dollar slumped heavily in September after the Reserve Bank of New Zealand (RBNZ) reported its biggest currency market intervention since 2007.

This was confirmation of a massive 521 million NZD sale conducted in August of this year. There is a fear that more action will come after the RBNZ confirmed they believe the currency to be overvalued. 

In this environment agressive NZD buying action will likely be contained.

NZ Rates Today: (Markets Closed Until Monday).

• The British pound to New Zealand dollar exchange rate (GBP/NZD) is 0.00 pct higher at 2.0553.
• The euro to New Zealand dollar exchange rate (EUR/NZD) is 0.00 pct higher at 1.6108.
• The New Zealand to US dollar exchange rate (NZD/USD) is 0.00 pct lower at 0.7797.
• The Australian dollar to New Zealand rate (AUD/NZD) is 0.00 pct higher at 1.1298.

The above quotes are taken from the global FX spot market. It must be noted that your bank will widen the spread on the above numbers when passing on their retail rate to customers. An independent FX provider will however guarantee to undercut the bank's offer thus delivering you more forex. Please see more on this here.

Fears That More RBNZ Sales Will Happen Keeps a Lid on the Kiwi

The Bank Bank of New Zealand (BNZ) sent a chill through currency markets following the most recent RBNZ policy decision when they warned clients that the RBNZ will likely act again to keep a lid on the strength of the Kiwi:

"We reiterate that our own interest rate profile remains highly dependent on the NZD falling and falling quite aggressively.

"We remain of the view that this will be the eventual catalyst for the RBNZ to pull the trigger.

"Not surprisingly the RBNZ today reiterated the view that it believes the NZD to be 'unjustified and unsustainable' and that it is expected to moderate over coming years.

"Indeed, with respect to the currency, we wouldn’t be surprised if the RBNZ took the opportunity to give the currency another nudge sometime soon given that the environment is ripe for intervention to be effective given the combination of today’s RBNZ statement and the Fed’s statement, which had already seen the NZD fall over a cent.

"The RBNZ has now set itself a very high hurdle indeed before it contemplates raising interest rates again. This means that it will be very much later rather than sooner before it will be convinced to act.

"And the later it gets the more likely the NZ economy will be well and truly into its expected slowdown phase so the less likely rates will need to be raised at all."

But - Remember This

One does however get the sense that the NZD will not be subject to an all-out routing.

The reason being is simple - New Zealand still tops among developed nations when it comes to interest rate yields and will thus be subject to incoming currency flows as traders seek to capitalise on this superior return.

Nevertheless, low inflation in the South Pacific economy is expected to keep the RBNZ sidelined for longer on policy.

For some perspective, markets are now pricing in rates to rise less than 25 basis points over the coming year. The next RBNZ meeting is on Dec. 11.