New Zealand Dollar Strength Could be Here to Stay for 2015

The latest New Zealand dollar forecasts from BNZ, combined with a robust viewpoint communicated by Prime Minister John Key, confirm why the NZD will likely enjoy a solid 2015.

Will the current strength in the NZ dollar persist through the remainder of the year?

As we move through the second quarter of 2015 we consider this question and note that while the outlook is constructive there are some risks to be wary of.

The currency enters the quarter close to where it began the year against the pound sterling, a strong comeback if we consider that the GBP/NZD shot above 2.08 at one point. We are now seeing the pair at 1.9520.

Against the US dollar we see the February low of 0.7176 is a memory, the NZD/USD has formed a base and is trading higher at 0.7602.

Parity against the Aussie dollar still remains a prospect; AUD/NZD is now at 1.0177.

When considering the outlook for the kiwi dollar we see two drivers of importance at this stage: Actions at the RBNZ and the funadamental performance of the economy.

On both counts we see little reason to second-guess the NZD, however we would caution that  one ‘chink in the armour’ could relate to any return-to-strength in the USD.

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Currency Market Intervention Won’t Work Says PM Key

The New Zealand dollar is prone to bouts of weakness every time the management team at the Reserve Bank of New Zealand (RBNZ) hint that they may intervene in the currency markets in order to try and devalue the NZD.

The aim here is to try and beat the historically expensive kiwi dollar into submission. A strong currency tends to curb global enthusiasm for NZ products as they become more expensive.

Indeed, the RBNZ often does follow its rhetoric with action.

But, weakness from this kind of action has proven temporary. Why?

The New Zealand dollar was propelled by comments made by the country's Prime Minister John Key on the 9th of April who stated in a CNBC interview that in his opinion intervention does not work.

Key was referring to the kiwi dollar’s strength against the Australian dollar as the pair continues to hover near parity.

The PM went on to point out that intervention only works at the points of extreme and is ultimately ineffective against a long sustained trend.

“With RBNZ resolutely set against lowering rates in the foreseeable future the kiwi remains the preeminent carry trade in the industrialised world and that factor continues to prop the unit against G-10 currencies,” says Boris Schlossberg, analyst at BK Asset Management.

The BNZ Forecasts: Currency to Remain Well Supported

On the 9th of April we received the latest forecasts pertaining to the kiwi dollar from the research team at BNZ.

The picture painted is one of a strong NZD supported by a strong economy.

However, an all-out bull scenario is not priced into the future performance of the currency owing to the prediction that the RBNZ will not raise interest rates in 2015.

“The RBNZ will not be called upon to hike interest rates and bring it to an end, simply because there is no inflation to worry about,” says a Stephen Toplis at BNZ.

Interestingly though, “it is fair to say that near-term inflation will be sufficiently weak that the RBNZ may yet be bullied into lowering rates.”

This goes back to what we were saying earlier about the readiness of the RBNZ to jump into the markets in order to thwart the NZD’s advance.

While actively selling currency reserves has been noted by John Key as being pointless, achieving the same goal via cutting interest rates is a viable option.

However, we see this as a risky choice, particularly with the NZ property market looking so hot.

The Economy Remains Hot

Indeed, the economy does not require aid from lower interest rates.

BNZ say:  

“The New Zealand economy continues to hum along nicely with growth near potential and expected to stay that way through 2015. It’s a job-creating expansion which is slowly putting pressure on capacity. But, unlike normal cycles,

“Against this backdrop, the NZD will remain well supported but should still succumb to the commencement of the tightening cycle in the US.”

Beware the US Dollar

So while the outlook favours the kiwi currency at this stage, we note caution is sounded concerning the US dollar.

The dollar remains in a longer-term cyclical uptrend, and most global currencies are forecast to kneel down before it in coming months, the NZD included.

As such, BNZ strategists confirm they are awaiting a return to 0.76 and above in NZD/USD which would present an opportunity to enter a medium-term short position.

The analysts are targeting a fall to 0.72.

Dairy Prices Pose a Risk

Risks to the bullish NZD picture, and thus supportive of the NZD/USD sell, are posed by the price of New Zealand’s most important export: milk.

NZD shrugged off the 10% decline in dairy prices at the 2 April auction, partly because of the speculative trader interest to be long NZD/AUD in anticipation of an Australian interest rate cut.

“We think another negative (or even flat) auction result will bring that commodity price story to front of mind. We anticipate a period of subdued dairy auction prices over the coming six months, thanks to an overhang of milk supply,” says BNZ’s Raiko Shareef.

Keep an eye on falling inflation.

If inflation falls at an accelerated pace we could well see talk of an unnecessary interest rate hike.

If it were to be delivered then we could well expect a violent bout of NZD weakness.

However, as mentioned, with the economy looking strong we would not bet against the kiwi dollar.