New Zealand Dollar's Uptrend is Unsustainable, Says ANZ Bank

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The New Zealand Dollar has spent the last two and a half years strengthening against the rest of the field, but its days in the sun may be over, argue ANZ.

The New Zealand Dollar (Kiwi) has slogged higher against all of its major counterparts since its August 2015 lows but the clearest and steadiest gains have been against its US rival.

NZD/USD has risen from 0.63 in September 2015 to 0.73 currently.

The reason for the rise is something of a mystery given the Kiwi's main drivers - higher interest rates and low volatility - don't check out according to Sharon Zollner, Senior Economist, at ANZ, who concludes that the main driver, therefore, must be rising commodity prices and positive terms of trade (the difference between export and import prices).

This, and to a lesser degree a relatively robust domestic economy have kept the NZD on the upward track.

Another reason behind the persistence of the rally is the "out of favour" US Dollar, which is another mystery, although Zollner raises the "twin deficit" theory as one possible explanation.

NZD has risen against both the Pound and the Euro since August 2015 too, but has weakened against both currencies of late more than the US Dollar.

NZD/GBP rose from 0.41 to 0.52 - but has been falling from a peak of 0.60 for the last year.

NZD/EUR has followed a similar trajectory but in an even more exaggerated loop, due to the recent strength of the Euro; and it now only trades a little above the 2015 0.55 lows in the 0.59s.

Zollner concludes that the trend of NZD strength is unlikely to continue in 2018.

"The NZD seems to be following the supportive factors at the moment, but that could change quickly, particularly if the dark horse of global risk aversion enters the field, and we are certainly mindful of that possibility in a world where central banks are withdrawing liquidity and the global growth picture is arguably 'as good as it gets', leaving markets prone to a few disappointments.

Overall we are still of the view that as 2018 develops, the NZD will be put on the defensive," says economist.

ANZ's official forecasts back up this view with an end of 2018 forecast for NZD/USD of 0.67.

NZD/EUR they see falling to 0.52 and NZD/GBP to 0.49.

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