The New Zealand Dollar Outlook Dims as Economy Passes Peak Growth and Strategists say it's Time to Sell

- GBP/NZD seen to be in a short-term uptrend that can extend

- ANZ say New Zealand has hit peak growth, should constrain NZD upside

- JP Morgan say now is time to go 'short' on NZD

Image © Filipe Frazao, Adobe Stock

Pound Sterling remains on the front-foot against the New Zealand Dollar as we move into a new month, having registered a gain to 1.9589 at the time of writing - its highest level since May 18.

This would mark the fourth consecutive day of advances for the exchange rate and over the course of the past week the GBP/NZD has registered a 1.82% advance, keeping alive a strong short-term rally which we believe could go all the way to resistance levels located at 1.97.

Around 1.97 we see the previous 2018 highs and two areas of notable rejections which confirm solid offers for GBP/NZD can be found in this region.

The big support levels at 1.89-1.90 serves as a floor beneath the exchange rate below which bears fear to tread: We have seen this area hold on numerous occasions in 2017-2018 and would be confident saying that a sustained decline below here is unlikely.

The New Zealand Dollar's underperformance is notable and is now a notable feature of the current FX regime: at the time of writing, if we were to filter the currency's relative performance charts by the daily, weekly or monthly timeframes the New Zealand Dollar wold be the worst performing currency of the G10.

According to data overnight, New Zealand's business confidence slumped to its lowest in seven years in the second quarter as rising labour costs squeezed corporate bottom lines, reinforcing market views the economy may be in for a soft patch.

A net 20 percent of firms surveyed expected business conditions to deteriorate compared with 11 percent in the first three months of this year, a quarterly survey by the New Zealand Institute of Economic Research (NZIER) showed on Tuesday.

Firms' expectations about consumption also weakened with fewer businesses expecting improved demand over the next quarter, pointing to softer economic growth in the second half of 2018, the survey showed.

Of course global fears pertaining to trade are widely cited as being behind the move with the thinking going that a world that is trading less freely is not helpful to exporters in New Zealand. Rising US bond yields are meanwhile giving investors less reason to buy into New Zealand's historically attractive bonds in their hunt for yield.

But these are concerns shared by a plethora of economies, there must therefore be more to the NZD story.

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Peak Growth

It would appear that at the heart of the issue is the belief that the New Zealand economy has hit peak growth; i.e. the ability to be an outperformed on the global stage has passed and in a world where relative economic performance is key for currency value, this matters.

"We still think it will be difficult for the economy to grow above trend from here," says Sharon Zollner Chief Economist at ANZ.

Why do ANZ think the economy has peaked?

1) population growth is expected to subside

2) construction and tourism have likely topped out given capacity constraints

3) the housing market is looking stable and unlikely to accelerate

4) household spending is expected to remain contained

5) credit availability is expected to remain a constraint for some firms and households; 6) businesses are facing capacity and cost pressures

6) and potential GDP growth is expected to moderate as population growth slows and productivity growth is slow to respond

Zollner says the NZD is currently on the back foot, "and further weakness is expected as the implications of a turn in the global liquidity cycle continue to play out."

Importantly, "around current levels, the NZD is close to where some of our models suggest is fair," adds Zollner.

Separately, strategists at the world's largest investment bank, JP Morgan, say now is the time to open fresh bets against the NZ Dollar in anticipation of further weakness playing out.

"Policy divergence warrants a larger NZD short as the curve is beginning to toy with the idea of rate cuts after the RBNZ acknowledged disappointing growth outturns," says strategist Paul Meggyesi at JP Morgan in London.

Meggyesi says the monetary policy trades have done "especially well" - noting NZD fell sharply as the RBNZ acknowledged the disappointing economic data prints which has encouraged the market to toy with the idea of rate cuts.

The New Zealand Dollar fell in the previous week after the Reserve Bank of New Zealand doubled down on its message that Kiwi interest rates will remain at record lows for "some time to come", while also flagging growing risks to both domestic and global economies.

RBNZ governor Adrian Orr said the Bank expects New Zealand's economy to be supported by household and government spending during the quarters ahead but that a recent slowdown in GDP growth suggests there is more "spare capacity" in the labour market than previously thought.

"The best contribution we can make to maximising sustainable employment, and maintaining low and stable inflation, is to ensure the OCR is at an expansionary level for a considerable period," Orr says, in a prepared statement.

The NZ Dollar extended its poor run as markets resigned themselves to the fact that the currency would not find support via the interest rates channel anytime soon.

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