New Zealand Dollar Forecast to Remain Challenged at ASB

"Narrowing interest rate differentials reduce a key NZD tailwind" - ASB.

Image © Adobe Images

Risks to the New Zealand Dollar are skewed to the downside according to a major New Zealand lender, as investors are lured by rising global interest rates at a time when the Reserve Bank of New Zealand (RBNZ) has indicated it has likely ended its rate hiking cycle.

Auckland Savings Bank (ASB) says the RBNZ is increasingly standing out as 'dovish' amongst increasingly 'hawkish' peers, given it recently signalled it was broadly happy with the level of interest rates in New Zealand.

"Narrowing interest rate differentials reduce a key NZD tailwind," says Kim Mundy, Senior Economist at ASB Bank.

In a monthly review of the New Zealand economy and its currency, ASB finds widespread hawkish rhetoric at other developed market central banks is starting to erode the Kiwi's favourable interest rate differentials.

This after the RBNZ indicated in late May it had finalised the hiking cycle having raised the base lending rate to 5.5%, saying at the time "we'd call today's decision a conditional 'one and done' outcome."

The Bank of England is one major central bank that has played catch-up with the RBNZ, having hiked Bank Rate to 5.0% last week alongside other central banks from Norway and Switzerland. At the same time, markets are poised for further rate rises at the European Central Bank and Federal Reserve.

"NZD/EUR and NZD/GBP dipped, driven in part by the surprise 50bp hike by the BoE," says Mundy.

"The outlook for central bank tightening and its impact on both interest rates and recession expectations will continue to drive currencies. That's a challenging environment for NZD and suggests the risks are skewed to the downside in the near term," she adds.

Above: The change in the New Zealand Dollar's value in 2023 versus G10 peers.

The rise in global interest rates is meanwhile expected by economists to weigh on global economic growth, creating the macroeconomic backdrop that tends to be associated with NZ Dollar weakness.

But the macro backdrop can prove supportive if Chinese authorities announce a significant stimulus to boost the economy, according to ASB.

On Tuesday it is reported that Chinese Premier Li Qiang told a conference his government would roll out more effective measures to boost demand and that the economy was on track to reach the 4.5% growth target for the year.

The announcement offered NZD and AUD a boost on the day, but we note thus far Chinese stimulus packages have been highly targeted and have failed to boost the likes of the Australian Dollar as authorities are primarily focused on stimulating consumer demand.

This does not favour the industrial commodity exporting Australian economy but can help the food-focused exporters of New Zealand.

"A material stimulus announcement from China can support NZD," says Mundy.

Looking to the medium term, ASB expects further easing in NZD as the global economy slows with losses expected against the U.S. Dollar, Euro and Pound.

But ASB expects NZD will start to recover over the latter part of 2024, in line with the recovery in the global economy.

The New Zealand Dollar to U.S. Dollar exchange rate is forecast at 0.58 by the end of September, 0.61 by year-end, 0.62 by the end of March 2024 and 0.63 by the end of June 2024.

For the New Zealand to Euro exchange rate, the forecast profile for the same timeframe is 0.58, 0.61, 0.62 and 0.63.

Turning to the New Zealand to Pound exchange rate, ASB is forecasting 0.58, 0.61, 0.62 and 0.63. This gives a Pound to New Zealand Dollar forecast profile of 1.72, 1.64, 1.61 and 1.58.