More New Zealand Dollar Strength to Come: DBS

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The New Zealand Dollar's short-term outperformance continues and brings it closer to a new 2024 high against the U.S. Dollar. One strategist thinks there is more strength to come.

Philip Wee, Senior FX Strategist at DBS Bank, says he is 'long' the New Zealand Dollar against the U.S. Dollar as he expects it to fully recover 2024's losses and then push higher.

The call comes after the NZD/USD exchange rate reached its highest level since January 02 at 0.6254, driven by the broader and ongoing pullback in the U.S. Dollar. The Dollar's decline is mirrored by rising global equity markets and buoyant investor sentiment, signalling conditions that typically favour the New Zealand and Australian Dollar.

The NZ Dollar is also putting pressure on other G10 currencies, with the Euro and Pound losing ground through the course of August. Further NZD/USD outperformance - if realised - can weigh on GBP/NZD and EUR/NZD and threaten breakdowns to fresh multi-month lows, (although neither pair is likely to see the 2024 lows anytime soon).

"NZD/USD can return to the 0.6320 level at the end of 2023 to fully recover this year’s losses. Technically, NZD/USD has broken above this year’s primary psychological resistance level at 0.62," says Wee.

Above: NZD breaks above a key resistance line.

What is notable is that much of NZD's outperformance has come despite a surprise New Zealand interest rate cut in August. Wee explains the focus quickly shifted to the USD weakness in anticipation of the Federal Reserve's telegraphed rate cut at the September 18 meeting.

The Dollar came under pressure and the NZD rallied after Fed Chair Jerome Powell last week signalled a September rate cut, saying, "the time has come for policy to adjust."

In his speech to delegates at the Jackson Hole symposium, he referenced fears that by not acting, the labour market would deteriorate. The market got the inkling that the Fed was prepared to be more committed to further cuts in subsequent months, which supports global growth prospects, to which the Kiwi Dollar is sensitive.

"The cooling in labour market conditions is unmistakable," said Powell. "It seems unlikely that the labour market will be a source of elevated inflationary pressures anytime soon."

Last week we reported strategists at JP Morgan said, "further NZD weakness will be harder to come by after RBNZ's first cut; trim shorts."

The strategic call to "trim shorts" shows JP Morgan thinks the lion's share of weakness related to the August rate cut at the Reserve Bank of New Zealand might have run its course.