New Zealand Dollar Forecasts Cut by Leading NZ Bank

The New Zealand is forecast to remain on the back foot by analysts at BNZ in New Zealand.

A downgrade to the NZD outlook comes as the currency continues to give away significant ground with a rate just below 2.40 being reached against the pound sterling in mid-July.

The pound to New Zealand dollar exchange rate (GBPNZD) briefly broke above 2.04 as the after effects of a dire Fonterra auction saw the kiwi plumb new lows.

At the time of writing the rate has retracted back towards 2.3870 with the typical bank offering a rate in the region of 2.3190 and specialist currency providers delivering closer to the market at 2.3572.

Note independents can regular deliver up to 5% more FX when compared to banks and the multi-national transfer companies.

The trend is undeniably against the New Zealand dollar at present with a fresh bout of selling coming on the back of a the soft dairy auction Wednesday (GDT -10.7%).

Dairy prices fell heavily, across all major products, and near term indicators are extremely weak. It was every bit as
bad as analysts were braced for – and then some.

Why does dairy matter for the New Zealand dollar?

A strategy note released today by BNZ in Aukland explains:

“If you thought dairy prices were ugly before, they are horrendous now. We estimate aggregate prices are at their lowest level since 2002.

“This for NZ’s biggest export product that accounted for nearly a third of goods exports last year and nearly a quarter of all exports. It will hit NZ’s economic growth, lower the terms of trade further and widen the current account deficit.”

A soft Q2 inflation reading has also failed to install confidence with Q2 NZ CPI reading at +0.4% q/q, a shade below the +0.5% consensus and - 0.3% in Q1.

Expect Further RBNZ Cuts Ahead

The flow of poor economic data makes it almost certain that the Reserve Bank of New Zealand will cut its base interest rate further.

Global interest rate differentials are the main driver of currency valuations at the present time with the NZ dollar enjoying a protracted period of strength owing to the high interest rate maintained at the central bank.

However, global currency flows are reversing as the yield advantage enjoyed by New Zealand for so long is whittled away.

“Today’s CPI details, choppier economic data and, notably, the 17% slump in dairy export prices since the June Monetary Policy Statement, will probably convince the RBNZ to cut its policy rate all the way back to 2.50% by October,” says a strategy note issued by BNZ on the 15th of July.

New Zealand Dollar Forecasts Lowered

BNZ have cut their forecasts on the New Zealand dollar further as a result.

“We now forecast the trough in NZD/USD to be 0.60 in Q1 2016, materially deeper and slightly earlier than previously envisaged. This embodies a sharp descent from current levels,” says the strategy note.

BNZ anticipate the RBNZ will deliver both the July and September rate cuts with a prominent easing bias.  But it is the
commencement of the Fed’s tightening cycle that will do the lion’s share of the work in driving NZD/USD lower.

The pound sterling v New Zealand dollar is forecast to fall to 2.4516 by December 2015 and 2.5163 by June 2016.