New Zealand Dollar a "Laggard" but Can Perform Against US Dollar, Pound say Societe Generale

-NZD to lacks positive narrative, is a "laggard", say Societe Generale.  

-But the Kiwi can recover as USD weakens and terms of trade improve. 

-NZD/USD forecast to rise, GBP/NZD trades sideways, AUD/NZD gains.

© Mike Mozart, reproduced under CC licensing

The New Zealand Dollar is set to be the "laggard" of the developed world currency basket in the second half of 2018, according to forecasts from Societe Generale, although it can still rise against the US Dollar and hold its own in the face of a recovering Pound Sterling.

New Zealand's Dollar has been hamstrung in recent months by the combination of a downbeat Reserve Bank of New Zealand policy outlook and a global financial market environment that has seen "risk" currencies like the Kiwi shunned by traders, who have preferred the relative safety and more attractive yield of the US Dollar.

However, the tables are now turning on the US greenback once again and the outlook for wholesale prices of powdered milk, New Zealand's largest export, has improved of late. Both of these factors are likely to have positive implications for Kiwi Dollar exchange rates during the months ahead.

"The Kiwi dollar is expected be a laggard in 2H18 due to the lack of a compelling policy or growth story to drive it. The rising terms of trade however should prevent NZD from weakening too much on a trade-weighted basis," says Kit Juckes, chief FX strategist at Societe Generale. "We see AUD/NZD persisting on its long-term upward trajectory, but NZD/USD will likely be supported by the US dollar's gradual decline."

Economic growth slowed to 2.9% in New Zealand during 2017, down from 4% in 2016, and is forecast by economists to have slowed further during the first-quarter of 2018. Markets are looking for the Kiwi economy to have grown at an annualised pace of 2.7% during the three months to the end of March, when the data are released at 23:45 London time on Wednesday.

This, and persistent weakness in inflation, have kept the Reserve Bank of New Zealand from raising its interest rate from the current record low of 1.75%. And the anticipated slowdown in growth for 2018 is seen cementing the RBNZ into its "on hold" stance until well into the 2019 year at the least. As a result, the New Zealand Dollar offers investors and traders little grounds for excitement during the months ahead.

"Inflation pressures have been muted in recent years and are more so now that growth has cooled. The RBNZ is thus expected to retain a neutral policy setting well into 2019. The economic situation certainly justifies the RBNZ remaining “accommodative for a considerable period", says Juckes. "The one major positive for the Kiwi dollar is the record high level of New Zealand’s terms of trade thanks to rising export prices."

Wholesale prices of powdered milk, New Zealand's largest export, have risen in 2018 and are expected to increase further during the second half. Fonterra, a Kiwi company that is the world's fifth largest producer of dairy products, raised its forecast for 2018 farmgate milk prices from $6.40 per kilogram of milk solids back in December to $6.75 in May. 

This is important for the Kiwi currency because it increases the anticipated value of New Zealand's exports relative to its imports, which can support the currency during the months ahead. 

The Societe Generale team forecast that this, and renewed weakness in the US Dollar, will push the NZD/USD rate up to 0.72 before year-end. This is broadly in line with the increase penciled in for the Pound-to-Dollar rate and implies a 3.5% rise from Monday's 0.6950 level. 

The Pound-to-Kiwi exchange rate forecast to trade sideways at 1.90 until the end of the year, despite Sterling also being forecast to rise against the US Dollar, from 1.32 in June to 1.37 by year-end. Meanwhile, the AUD/NZD rate is seen maintaining its gradual uptrend to finish the year at 1.11, which implies an increase of 4% from Monday's level of 1.07.

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