Further New Zealand Dollar Declines Forecast by Barclays

Analysts update us on the outlook for the NZ dollar against the Australian dollar, pound sterling and other global currencies.

A pause in the Reserve Bank of New Zealand’s (RBNZ) interest rate raising cycle in response to very low inflation, further declines in export commodity prices and continued slowing economic momentum is likely to see the NZD exchange rate complex underperform over the next 12 months.

This is according to exchange rate forecasters at Barclays who have analysed the prospects for the NZ dollar in their latest FX Quarterly note.

Commenting on the outlook for NZD is Barclays' Kieran Davies:

"Very low inflation, further declines in export commodity prices and continued slowing economic momentum are likely to see the RBNZ remain on hold until at least June 2015.

"In addition, the central bank’s discontent with the high level of the NZD should continue to encourage currency depreciation."

As a result Barclays forecast the Kiwi will fall with the Australian to New Zealand dollar exchange rate (AUD/NZD) expected to reach 1.12 at the end of December 2014 and 1.14 at the end of June 2015.

The rate is currently located at 1.0805.

We meanwhile see the pound to New Zealand dollar exchange rate (GBP/NZD) maintaining ground above 2.000 as we move through 2015 on the back of this soft assessment.

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RBNZ To Help Keep Kiwi Dollar Soft

With UK and US interest rates expected to rise in 2015 so the yield advantage of New Zealand's financial assets diminishes.

The country has seen significant inflows of global currency in recent yields as investors rush in to take advantage of superior interest rates.

As other nations raise their rates, and New Zealand delay rate hikes, so the advantage dissipates and the demand for NZD diminishes.

"The RBNZ’s tone has become increasingly dovish recently and we do not expect the central bank to resume its tightening cycle until the middle of 2015 vs. RBA rate hikes beginning in Q1 2015," notes Davies.

Furthermore, the large downside NZ CPI inflation surprise (1.0% y/y vs. RBNZ's expected 1.3%) in the third quarter of 2014 as well as easing housing market pressures, increases the chance of an even-longer pause to the interest rate raising cycle according to Barclays.

The October OCR Review confirmed a break in the RBNZ’s tightening cycle by noting that a “period of assessment remains appropriate before considering further policy adjustment”.

This followed indications of such a pause in the September RBNZ Monetary Policy Statement which included significant downward revisions to its interest rate forecasts.

Threat of More RBNZ Action Weighs on the Outlook

"In addition to the central bank’s dovish rhetoric about the prospect of further interest rate increases, it has also become substantially more aggressive in its desire to achieve a lower currency," notes Barclays.

Following the large intervention by historical standards in August when the RBNZ sold a net NZD 521mn, the central bank released an unscheduled “statement” on 25 September, emphasising its view that the NZD strength is unjustified and unsustainable.

Davies tells us:

"Given further softening in export prices in September and October alongside a likely slowing in future economic activity, additional NZD selling cannot be ruled out if the currency appreciates or remains at these levels.

"At the very least, we expect the RBNZ’s discontent with the high level of the NZD to continue to encourage currency depreciation.

"In relative terms there is more scope for NZD depreciation relative to AUD given that our BEER model sees the NZD as around 17.6% overvalued, vs. 14.9% for the AUD."