New Zealand Dollar's Selloff Has Gone Far Enough: HSBC

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The New Zealand Dollar's selloff has gone far enough, say strategists at HSBC, who close a sell recommendation.

"Antipodean currencies screen cheap. We close our sell NZD trade idea, with a positive performance of 1.8%," says Lenny Jin, Global FX Strategist at HSBC.

The New Zealand Dollar has witnessed a significant selloff in recent days, driven by a sharp reversal in the Yen's fortunes and a slew of disappointing developments in China.

"The direction of travel does not surprise us. We turned bearish on both currencies recently," says Jin.

The selling pressures have eased as investors gear up for the Bank of Japan's policy decision, where any disappointments could result in a retreat in the Yen, which can aid a strong comeback by the New Zealand Dollar.

HSBC's models show the recent selloffs in AUD and NZD leave the two currencies with cheaper valuations. However, analysts caution that while modelling finds the currencies as cheap, it does not mean they are due a significant rebound.

HSBC thinks the U.S. Dollar will remain firm, which can keep NZD's prospects in check. Domestically, the Reserve Bank of New Zealand (RBNZ) provides additional headwinds.

"Taking domestic drivers into consideration, the dovish pivot by the RBNZ in July raised the risks of an earlier and faster rate cut cycle than previously expected," says Jin.

Incoming data confirms the New Zealand economy continues to strain under the weight of higher interest rates, while at the same time Chinese demand for New Zealand exports continues to disappoint.

"We're sticking with our non-consensus view that the RBNZ will start cutting rates at its next meeting in August," says Abhijit Surya, Australia and New Zealand Economist at Capital Economics.

The calls come after the most recent New Zealand Retail Radar report shows a continued deterioration in the Kiwi consumer. It reports slow retail sales and uncertainty "are continuing to dog the retail sector, with low consumer confidence and rising costs impacting customers’ willingness to open their wallets."

However, with earlier rate cuts now apparently priced in, and NZD exchange rates having devalued, "As a strongly bearish NZD bias looks less appropriate at this level, we decide to close our sell NZD," says Jin.