NZ Dollar Forecast to Fall Further by TD Securities and Danske Bank

The New Zealand dollar exchange rate complex (NZD) is forecast to remain under pressure until the end of 2014 amidst signs that global financial market dynamics remain unfavourable.

The ultimate driver for the predicted drop in the NZD’s valuation lies with global fund flows - at present there is a large flow of money heading back to the United States as quantitative easing ends and the US Fed looks forward to raising interest rates.

“With the Fed winding up QE on schedule and the USD proving more resilient into the year-end than we had expected, we think owning some NZDUSD downside makes sense,” says a currency note issued by TD Securities.

TD Securities point out that the NZD is the best-performing G-10 currency in the QE era (+35% versus the USD since end 2008).

“So taking away the “punchbowl” may add to already evident headwinds and undermine its performance — as was the case in 2010 and 2011 bouts of “QE-off” when volatility spiked and the market shunned higher risk assets,” say TD Securities.

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Danske Bank Also Negative on the NZ Dollar

It’s not just TD Securities who have adopted a negative forecast for the NZ dollar.

Looking into 2015 is the team at Danske Bank who gives us the following reason for betting against the New Zealand dollar:

"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.”

US Dollar Retains Fresh Highs

The strength of the US dollar continues unabated.

The U.S. dollar held near the upper end of its recent ranges following the release of the closely watched payrolls report for October.

Dennis de Jong, managing director at UFX.com, comments on the outcome:

“The slightly disappointing nonfarm payrolls report won’t cause Janet Yellen and her Fed colleagues too much of a headache just yet. September’s figures were excellent and although October has come in below expectations, the US economy remains fairly robust as it approaches the all-important holiday season.

“The Fed has already made it clear that an interest rate hike is unlikely to come before next summer. We wouldn’t expect anything to happen much before then, particularly with the ongoing global geopolitical concerns that still have the potential to wreak havoc on global markets.”

The euro meanwhile fell to a new 26-month low against the dollar overnight before paring some losses ahead of U.S. payrolls.

"The single currency slipped across the board after the ECB yesterday kept rates unchanged but signaled that it will continue to target a hefty expansion of its balance sheet. The fact that the ECB continues to target a specific level for the size of its balance sheet suggested a report earlier this week about a growing rift between policymakers may have been overdone and that the door to further ECB easing remains wide open," says Omer Esiner at Commonwealth Foreign Exchange.