New Zealand Dollar Rebound Done for Now says BNZ in Forecast Update

"In recent weeks we have noted we thought the NZD was a little richly priced and was due for some consolidation after a strong run" - BNZ.

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One of New Zealand's largest lenders says it is not expecting any major appreciation in the value of the New Zealand Dollar over the next "couple of months".

Bank of New Zealand (BNZ) says the New Zealand Dollar's most recent declines were long overdue, having noted the currency to be "a little richly priced and was due for some consolidation after a strong run".

The New Zealand Dollar has fallen slightly against the Pound in February but is a more substantive 1.80% lower against the U.S. Dollar, having risen for four consecutive months.

"In recent weeks we have noted we thought the NZD was a little richly priced and was due for some consolidation after a strong run. Last week’s price action closed the gap between the NZD and our fair value model estimate," says Jason Wong, a currency strategist at BNZ.

The Pound to New Zealand Dollar exchange rate is now quoted at 1.9082, and the New Zealand Dollar to U.S. Dollar conversion is at 0.6334.

BNZ's short-term fair value model estimate for NZD/USD has been largely stuck in a 0.63-0.64 zone over the past couple of months, with the positive impact of higher risk appetite offset by weaker NZ commodity prices.

"Last week's tumble in the NZD should be seen in that context," says Wong.

The New Zealand Dollar fell against the U.S. Dollar, Pound and Euro last week after all three peers were subject to central bank decisions.

But it was a surprisingly strong U.S. jobs report on Friday that set markets alight.

Stock markets fell and investors turned bearish after the U.S. added in excess of half a million jobs in January, raising expectations for higher interest rates at the Federal Reserve.

The New Zealand Dollar tends to underperform when global markets sell-off and any recovery in the currency could well depend on how market sentiment evolves over the coming weeks.

A downside risk to the Kiwi, therefore, is if Fed rate hike expectations continue to rise as incoming data shows inflation is unlikely to fall as fast as the Fed hopes.

"We could well be heading for a couple of months of volatile trading and little progress being made on the NZD’s recovery. The strong US data challenges the prevailing narrative for the year of the US losing its growth-leadership status," says Wong.

BNZ forecasts the GBP/NZD exchange rate to be at approximately 1.89 by the end of the first and second quarters of 2023, which implies some downside from current levels in spot.

Further declines to 1.85 are seen by the end of the third quarter, ahead of a return to 1.89 by year-end. (If you are looking to protect or boost your international payment budget you could consider securing today's rate for use in the future, or set an order for your ideal rate when it is achieved, more information can be found here.)

Above: GBP/NZD continues to respect a well-defined and tight range. Consider setting a free FX rate alert here to better time your payment requirements.

For the USD/NZD exchange rate, the forecast profile for these timeframes is 0.65, 0.67, 0.69 and 0.70.

NZD/EUR is seen at 0.59, 0.60, 0.60 and 0.60.

Elsewhere, economists at the investment bank Société Générale are also looking for an uninspired performance from the NZ Dollar.

"The New Zealand dollar is also benefiting from faster growth in China, but is however less responsive to it than the Australian dollar," says Kit Juckes, Global Head of Foreign Exchange Strategy at Société Générale.

"The NZD is likely to trade on the soft side near term," he adds.