New Zealand Dollar Forecasts Lowered on Fundamental and Technical Basis

The New Zealand dollar's 2015 sell-off is not yet over warns a just-released institutional currency analysis.

The analysis comes as foreign exchange professionals frantically re-adjusting their forecasts for the New Zealand dollar in the wake of June’s interest rate cut which is seen as something of a game-changer for the currency.

The cut took markets by surprise judging by the aggressive sell-off witnessed with the headline pair of NZD/USD declining from 0.72 to 0.70, a low abandoned in 2010. At the time of writing this exchange rate is at 0.6982.

The pound to New Zealand dollar exchange rate (GBPNZD) meanwhile rose from 2.1356 to a week’s high of 2.2318 – we are looking at a 5 year best for the conversion. At the time of writing the pair is quoted at 2.2348.

It was not just the cut itself that has seen downgraded forecasts - it is the outlook communicated by the RBNZ that made analysts and traders take fright.

In the note accompanying the statement the central bank warned they are ready to cut rates further if required, based on data.

The RBNZ specifically targeted the exchange rate when saying they are unwilling to entertain what they see as an overvalued currency any longer.

One of the first institutional  analysis which we have seen in the wake of the move comes from the team at Intessa Sanpaolo in Rome who told clients the NZD is still overvalued when all evidence is taken into account.

Their base case is for further declines; “we confirm our expectations for a further depreciation of the New Zealand dollar to below the NZD/USD 0.70 mark, and leave our forecasts on a 3m-6m horizon unchanged at NZD/USD 0.68-0.65.”

This is the period in which the two main downside factors are concentrated: the possibility of the RBNZ cutting interest rates further and – by contrast – the start of the Fed’s reversal on rates.

Analysts say the contrast is all the more striking as last year the RBNZ was the only advanced country central bank to hike interest rates (from 2.50% to 3.50% between March and July).

“We have also revised downwards the expected values on the residual forecasting horizon, to NZD/USD 0.70 on a 1m horizon and NZD/USD 0.67-0.72 on a 12m-24m horizon,” say Intessa Sanpaolo.

British Pound to Rise Further

As mentioned, the pound sterling has powered to inter-year highs against the kiwi dollar and there is little to indicate that an end to the strength is likely.

Matt Weller, a technical analyst at Forex.com has studied the charts and says he sees scope for further upside moves in GBP-NZD:

“While the rally in GBPNZD has already been massive by any measure, there are still technical reasons to expect it stretch further as we head through the second half of June.

“After forming an extended rounded bottom pattern dating all the way back to 2010, the GBPNZD rally kicked into overdrive with last month’s surge through multi-year resistance at 2.10. As of writing, the unit has now stretched all the way up to 2.2150, but there could still more gas in the tank based on the secondary indicators.

“The MACD is trending sharply higher above its signal line and the “0” level, showing strong and growing bullish momentum. For its part, the RSI has edged into overbought territory, raising a potential near-term yellow flag, but the mere fact that it was able to reach this milestone signals strong buying pressure in and of itself.”

Weller says the pound sterling could push higher towards the long-term 38.2% Fibonacci retracement at 2.2350 on the back of the strong bullish momentum as soon as next week.

“A pause or pullback is possible off that level, but the longer-term bias will remain bullish as long as rates hold above previous-resistance-turned-support at 2.10,” says Weller.