New Zealand Dollar Forecast to Suffer More Losses Warn BNZ Forecasters

"We would consider rallies toward 0.76 as opportunities to enter strategic short positions, targeting 0.70." – Raiko Shareef at BNZ.

Newly released NZ dollar (NZD) exchange rate forecasts point to a resumption of the weakness experienced by the currency at the end of 2014 / early 2015.

According to the latest analysis on the Kiwi issued by researchers at BNZ, the medium-term outlook is still negative, despite recent gains seen in dairy prices at auction.

NZ Currency Exchange Levels

For general reference, the wholesale US to NZ dollar exchange rate at the time of writing is at 0.7527 while the bank rate you would receive on the retail market is seen around 0.7232.

The pound to New Zealand dollar rate is at 2.0474, the retail rate on offer from your leading banks is at 1.9671. Independent specialists are getting tighter to the market and are quoting at around 2.0331.

With regards to euro / NZD, the market is at 1.5054, bank offers are seen in the region of 1.4464 and independents are coming in closer at 1.4949.

NZ dollar enjoys a February Recovery

NZD has enjoyed a strong performance relative to its peers since RBNZ rate cut expectations hit fever pitch after the Reserve Bank of Australia cut its policy rate in early February.

RBNZ Governor Wheeler’s even-handed speech the following day steadied the kiwi, and analysts then projected a spell of outperformance by the NZD on the back of expected, solid economic data.

"Strong results from quarterly employment and retail sales reports, not to mention huge back-to-back gains in dairy prices, has NZD/USD back above 0.7500," note BNZ in communication to clients.

The GBP/NZD is meanwhile off its 2015 maximums and edging lower again.

BNZ are Forecasting a Return to Weakness for NZD

The team at BNZ have told clients that they believe the spell is about to break.

“On a technical basis, 0.7610 provides strong resistance, having been an important support during H2 2014’s downtrend,” says Raiko Shareef at BNZ in reference to the AUD v NZD’s likely direction.

Shareef also suspects that further upside in NZD/USD will be constrained materially by the historic levels in AUD/NZD.

“While we would be unsurprised to see fresh post-float lows, a much better fundamental picture in NZ vs AU would be required to see the cross race to parity,” says Shareef.

Pound to NZ dollar outlook

As we can see, the British pound’s progress against the kiwi dollar remains positive, albeit glacial:

The strongest conclusion we can draw at this stage is that 1.90 looks to be the absolute limit of any bout of GBP strength.

Noting that New Zealand is at a cyclical peak, a slowing in economic activity will pressure NZD lower while the impending UK interest rate rises will likewise boost GBP further.

Again, progress will be slow and in all likelihood choppy.

Fundamentals to Weigh on the Kiwi

On a fundamental basis, the positive beat in NZ data is unlikely to support further upside.

"The broader picture is still one of a country that has reached its cyclical peak," say BNZ in a currency research note to clients.

We continue to watch dairy auction prices.

BNZ are now forecasting a $4.80kg/MS milk payout from Fonterra for the 2014/15 season.

This is up from a previous forecast of $4.50.

Fonterra's current forecast is $4.70 is due to be updated this week (our best guess is 25 Feb NZT). It seems likely that they will maintain at $4.70 or possibly even revise marginally higher.

Shareef says:

"Keep in mind that part of the increase in prices is because of the drought conditions in NZ. We've always had a modest recovery in prices in our forecasts. The drought has (for the most part) just front-loaded that recovery.

"In real GDP terms, this will be an unambiguous negative for NZ, but we can imagine a knee-jerk kick higher in NZD/USD on the headline that Fonterra maintained/upgraded its forecasts. Hence why we'd use this as an opportunity to get short NZD, rather than become bullish NZD."