New Zealand Dollar Forecasted Lower by BNZ, Dairy Auction Ahead

“The wheels haven’t yet fallen off the NZ economy but it is running out of fuel.” – BNZ in their latest assesment on the outlook for the economy and the New Zealand Dollar.

The New Zealand dollar (NZD) complex enters on the back foot – homage to the trend lower in place since April.

Yes, the pound v New Zealand dollar exchange rate is still off the 2015 record at 2.40 but one gets the sense that it is a mere matter of time before that rate is achieved once more.

As we enter August the pound to New Zealand dollar (GBPNZD) is quoted at 2.3790, the New Zealand to US dollar exchange rate (NZDUSD) is at 0.6548.

Against the Australian dollar, the (AUDNZD) is seen at 1.1072.

Note, the above quotes represent the global market rate; the retail rate offered by your bank will have commission scalped off resulting in a skewed rate. However, an independent FX specialist will get you closer to the market as they operate tighter margins, this can result in up to 5% more currency being delivered in some instances.

Reasons why the New Zealand Dollar will Likely Fall

BNZ have updated clients today with the viewpoint that two further cuts to the OCR rate will be delivered in 2015.

Those new to the currency game should keep in mind that cutting interest rates is like delivering a little dose of poison to exchange rate levels. This can be a good thing, particularly to under-pressure New Zealand exporters who need their goods to come down in price on global markets.

Money markets are expecting the RBNZ to cut interest rates once more in 2015 - this is too a benign view argue BNZ who are pricing in two cuts.

Falling interest rates typically boost economic performance, something the country requires. “The wheels haven’t yet fallen off the NZ economy but it is running out of fuel. The likelihood of growth forecasts being lowered is increasing by the day,” says Stephen Toplis at BNZ.

The downside risks to New Zealand’s growth continue to increase, BNZ cite the following:

• "The plight of the dairy sector is well known but this week we also added relatively soft building permit figures and, today, a less-than-bullish business opinion survey.
• "What was particularly sobering in this month’s ANZ survey was the news that every sector apart from retail now has sub trend expectations for activity.
• "Non-residential construction expectations actually went backwards. These figures are a very strong indication that the pace of increase in activity in Christchurch is slowing rapidly such that the region will soon become a headwind to national GDP growth rather than the strong tailwind that has prevailed over the last few years.
• "We think the unemployment rate is now trending higher. This should be confirmed in next Wednesday’s Labour Market Report."

BZN say they believe it is hard to see the data flow changing the kiwi dollar’s direction, in any sustainable way, for the foreseeable future.

The only way from here, then, is lower.

New Zealand Dollar: Outlook for the Week Ahead

Key Events:

• Dairy Auction, 4-5 August

“The RBNZ easing cycle was triggered by the slide in dairy prices, with the subsequently much lower NZD at least providing some offset. With enhanced supply and unreliable demand from China, we doubt we’ve seen the floor yet,” says TD Securities in their Asia-Pac Week Ahead briefing.

• Aug 5 Employment report, Q2 +0.5%

“ANZ biz report suggests an easing of labour demand, while supply is enhanced via strong migration, so we pencil in a more modest +0.5% lift in employment in the quarter, with a tick higher in the participation rate leaving the unemployment rate at 5.8%” say TD Securities.

Outlook for the Commodity Dollar Complex

Looking at the week ahead for the likes of the commoidity dollar complex we see employment reports will dominate proceedings and TD Securities tell us they are looking for downside risks for July Aussie employment, in-line New Zealand Q2 employment, and upside risks for Canada, at least relative to early consensus.

“We look for a 15k gain in July, rebounding from the 6k loss in June. Rather than reflecting any optimism, we think the issue could be seasonal factors in the temporary hiring in the service producing sector, as well as the Pan Am games,” says Richard Kelly, Head of Global Strategy at TD Securities in London.

Kelly continues to be uneasy about full-time hiring being ripe for a correction lower, though, so upside in employment should likely be seen as an entry point for positioning for a greater likelihood for a further Bank of Canada rate cut.