New Zealand Dollar Downside Bias Maintained by Institutional Analysts

Sentiment is biased against the NZ dollar at the present time with most institutional investors forecasting weakness in the exchange rate to continue.

The NZD has fallen sharply over the past month, depreciating modestly against a generally weak US dollar and declining more significantly against sterling and the euro. We look at the views presented by a number of institutional investors to try and understand why the NZD is likely to continue under-performing in coming months.

For reference, at the time of writing the New Zealand dollar is quoted at 0.7315 against the US dollar and 1 Australian dollar buys 1.0784 Kiwi.

The pound to New Zealand dollar exchange rate converts at 2.1446 while the euro buys 1.5252 NZD.

Bank of America Merrill Lynch Global Research: The RBNZ Does not want a High NZD

Giving their latest viewpoint on the outlook facing the New Zealand dollar, Bank of America’s Adarsh Sinha says the central bank will work hard to avoid any strength in the domestic currency:

“In our view, the RBNZ would prefer not to cut in June especially given the strength of domestic demand as seen in the latest retail sales data. But it would like to maintain an easing bias to keep the NZD under pressure.

“However, it would be difficult for the RBNZ to be ambiguous about the precise path of rates like the RBA as the June MPS will contain its latest 90-day bill projection – effectively the anticipated path for the policy rate. Unless this is revised substantially lower in line with market pricing (roughly 45bp over the next year), the NZD is likely to squeeze higher. For now, we stay short NZD/USD via a put spread on the view that the RBNZ will do what is needed to ensure the NZD does not appreciate meaningfully from here.”

Lloyds Bank Research, in their May currency forecast briefing, back the idea of the RBNZ as being the likely driver of future NZD weakness. They see a rate cut looming:

“A particular catalyst has been a wavering in the policy stance of the RBNZ, as it has seemingly moved to an easing bias. In the statement following its April policy meeting the Bank acknowledged growing concerns about low inflation which, combined with its continued insistence that the NZD is overvalued, points to the possibility of interest rate cuts in the second half of the year.

“The announcement of macroprudential measures to control the housing market seemingly removes a significant barrier to lower rates. We believe the combination of a more dovish RBNZ and the likelihood of higher US interest rates will push the NZD/USD lower. Our forecast stands at 0.67 by end 2015.”

CICB: Signs of a Slowdown

CIBC’s Jeremy Stretch meanwhile forecasts losses ahead based on slowing New Zealand economic profile:

“Although Moody’s may have affirmed the AAA status of New Zealand, we remain wary of downside risks in the NZD. The Moody’s statement came despite the recognition that the 2015 fiscal backdrop may be worse than expected. NZ Finance Minister English has revealed that the shortfall is now estimated to be NZD684m as opposed to NZD572m, while the ’16 surplus will be less than previously forecast; it has been trimmed by NZD389m due in part to the impact of weakening agricultural revenues.

“The long term uptrend in inward net migration is showing signs of slowing while credit card spending declined 0.6% in April. Together, such influences underline burgeoning slowdown concerns. With the downside risks in the broad trade cycle set to be revealed into early next week, we maintain a bias towards NZD downside. We would fade rallies up to 0.7350, looking for a break of the 0.7270 strong support; such a break would trigger our take-profit target in our NZD USD short position.”

We would however argue that betting against the New Zealand dollar does have its risks as the economy does not necessarily appear to be in an all-out downward spiral. Any surprisingly positive data releases in coming months could well arrest any deep sell-offs if they are deemed to be strong enough to convince the RBNZ to stay clear of interest rate cuts.

That said, when it comes to the GBP-NZD the Bank of England will ultimately be entering a cycle of raising interest rates. This will make the attractiveness of funding any NZ purchases using sterling as a funding currency increasingly unnattarctive. We could well see GBP-NZD climb back to historic ranges.