New Zealand Dollar: Consolidation or More Losses Against the Pound?

The Reserve Bank of New Zealand (RBNZ) appears unprepared to offer the under-pressure New Zealand dollar any respite.

The pound sterling remains positively aligned against the NZ dollar with a recent pullback proving short-lived.

We had been concerned that the rally higher, in place since April, was due a pause owing to fatigue but any hopes for a reprieve may look wistful.

To be fair, our call for a period of consolidation looked justified particularly based on the overbought technical nature of the pound v New Zealand dollar and the decline from 2.30 down to 2.26 made us look like seasoned forecasters.

However our viewpoint was torpedoed by an unexpectedly aggressive Statement of Intent note issued the RBNZ on Friday the 26th.

Let it be known – the central bank wants a lower currency.

The Statement of Intent for 2015-2018 seized the opportunity to tirelessly repeat that the “unjustifiable and unsustainable levels” of the New Zealand dollar significantly hurt the economy together with current weakness in the Australian and Chinese economy and a sharp drop in Dairy prices.

CPI was noted as being consistently below the 2% target and even below the 1%-3% target range since Q3 2014; in addition markets do not expect inflation to move within the target range before Q4 2015.

Moreover, according to the latest forecast, we should wait until Q2 2016 to see inflation back around 2%.

“After a rate cut of 25bps in June, the dovish stance of the RBNZ coupled with low inflation pressures suggest that the Bank is not done with monetary easing moves yet. We therefore expect the RBNZ to lower its official cash rate to 3% at its next meeting (July 23) and the Kiwi to continue its free fall against the greenback,” says Arnaud Masset at Swissquote Bank.  

Continued downward pressure on New Zealand interest rates will keep the NZD under pressure for the remainder of 2015.

“It seems likely that the currency’s depreciation is not finished and comments from the Finance Minister have added to the pressure. We forecast NZD/USD at 0.64 by end 2015 and 0.72 by end 2016,” confirm Lloyds Bank in a note accompanying their most recent financial projections.

We caution though that there remains scope for a period of GBP-NZD consolidation as we would need the exchange rate to puncture the year’s high at 2.3035 before expecting a new bout of strength.

Fundamentals could also support consolidation - June Trade data printed better than expected at 350M versus -90M eyed as exports came in higher than expected and imports declined.

The news suggests that the New Zealand economy may be more resilient than previously thought and that the lower currency may be helping to boost the terms of trade.

Currency markets could also witness consolidation against the US dollar, according to Boris Schlossberg at BK Asset Management:

“After a very steep selloff of nearly 1000 points over the past several months the kiwi appears to have stabilised ahead of the 6800 level.

“The long term trend remains lower as the RBNZ is adamant in guiding the currency lower and will likely cut rates once again, but if the central bank decides to delay its easing program into late summer then the pair may find some support around this level and could stage a short covering rally up to the 7000 figure over the next few weeks.”