BNZ: New Zealand Dollar King in Q1

The New Zealand Dollar is forecast to have a strong start to the year but will see headwinds start to rise according to analysis from BNZ.

Helping the NZD at the start of 2017 is its relative undervaluation while a recovery in Asian currencies is tipped to increase demand for New Zealand dairy produce.  

The NZD is likely to strengthen against most of its rivals but against the US Dollar it will probably trade neutral in Q1.

“A period of near-term consolidation for the USD and a short-term recovery in Asian currencies could easily see the NZD climb back inside our fair value range,” says BNZ Chief Strategist Stephen Toplis.

Toplis expects NZD/USD to end Q1 at 0.70, which is just below the current 0.71 level, but sees this as a minimum bar, as the pair will, “trade much of the quarter above that threshold.”

We also note BNZ forecast a strong rise versus the Euro, which sees NZD/EUR move up to 0.70 from the current 0.67 level.

Q2 and Beyond

Of the outlook in Q2 and the rest of the year, BNZ say:

“Beyond our positive short-term view on Kiwi, the bias is expected to be one of downward pressure, largely reflecting our strong USD story.”

However, domestic factors are expected to provide underpinning support for the Kiwi versus other counterparts, particularly in the area of monetary policy which is expected to tighten more in New Zealand than in other countries bar the US.

“In a world where the Fed is the only major central bank on a tightening path, the RBNZ could well be the next central bank to join them,” says Toplis.

BNZ foresee the Reserve Bank of New Zealand raising interest rates by 0.25% in November 2017, followed by two further rises in 2018.

Apart from monetary policy, “domestic forces” are likely to be broadly positive.

Fading Support

The New Zealand Dollar had the backwind of a 15% rise in commodity prices in 2016 but is unlikely to get the same advantage in 2017, when commodity prices are expected to consolidate.

The General Election in New Zealand in H2 may also put pressure on the currency due to political uncertainty.

We have already noted how BNZ forecast NZD to hold its own or rise in Q1, but what about beyond then?

Versus the Dollar, the Kiwi will fall from 0.70 to 0.68 in Q2 and then 0.67 in Q3 where it should stay in Q4.

Against the Pound and the NZD is forecast to remain pretty steady at 0.59 until Q3, when the Kiwi is forecast to lose ground and fall to 0.57 and 0.56 in Q4.

With regards to NZD/EUR, BNZ see the exchange rate rising aggressively to 0.70 in Q1, but then dribbling back down to 0.69, 0.67 and 0.66 in Q’s 2,3 and 4 respectively.