New Zealand Dollar Weakness to be Temporary: CBA

The New Zealand Dollar is expected to maintain a firm bias in 2017 as the country's Trade Balance improves and possibly moves back into positive territory.

A positive Trade Balance strengthens a currency as it reflects a positive net demand for the currency.

The recent trade deficit in February was negative for NZD, and was due to a fall in the price and volume of exports, especially New Zealand’s largest export Whole Dried Milk powder.

“New Zealand’s trade balance was marginally weaker than expected over February, with a $18m deficit compared to our forecast of a small surplus of $127m. Most of the weakness versus expectations came via weaker-than-expected export values. In part, weaker dairy export prices and volumes explained the downside surprise,” says analyst Nick Tuffley at Commonwealth Bank Australia.

Dairy volumes, however, are forecast to recover leading to a “lift” in the Trade Balance in 2017, according to Tuffley.

The other major factor impacting on the Trade Balance was a 2.8% fall in the value of fruit exports, however Commonwealth’s economist sees the effect waring off.

“Again, we anticipate that some of this dip will unwind as fruit export volumes have been noticeably weak since November. Indeed, volumes have recorded double-digit falls in three of the four months, with the 39% fall over this period out of line with horticulture’s overall strength,” said Tuffley.

Overall the impact of exports on inflation and therefore the interest rate set by the Reserve Bank of New Zealand is forecast to be negligible.

“There are no implications for our OCR view. We expect the RBNZ to be on hold at 1.75% until late 2018,” says Tuffley.

Morgan Stanley Bearish (Short-Term) About NZD, Bullish the Pound

Despite Commonwealth Bank’s optimistic forecast for New Zealand exports, Morgan Stanley remain bearishly positioned versus the Kiwi in the short-term.

In a recent note seen by Pound Sterling Live, they reiterate their bullish GBP/NZD call, indicating they think the Pound will rise versus the Kiwi.

Their argument is that fears of a hard Brexit are overdone as Theresa May will be forced to adopt a softer stance than the market is currently pricing in.

This is because a hard Brexit would be too unpalatable for Scotland and Norther Ireland risking the break-up of the Union.

In addition, she sees little appetite for posturing before the EU summit on the matter of a strategy for negotiating Brexit on April 29, as the UK will not wish to antagonise the EU into a harsh position before negotiations begin.  

Their view on the New Zealand Dollar is that it will retain a weak tenor as markets are wrongly pricing in a rate hike in 2017.

“The RBNZ is firmly on hold for now, citing global uncertainties and has still called for a weaker NZD. We think the market pricing for hikes this year is unjustified,” says Redeker.

The risk to his stance is that USD weakens more than expected vs G10, which strengthens NZD more than GBP.

Morgan Stanley are in the middle of a long trade which bought at 1.7690, has a target at 1.8700 and a stoploss at 1.7465 which will close the trade automatically if reached.

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