Exchange Rates

new zealand dollar outlook

The New Zealand dollar is forecasted to maintain a bullish trajectory on the global exchange rate markets says UBS.

For reference sake, the pound to New Zealand dollar is 2.6 pct lower since the first of January 2013. Currently, 1 GBP converts into 1.8984 NZD.
The Australian dollar to New Zealand dollar rate is 9.3 pct lower, 1 AUD converts into 1.1371 NZD.
The New Zealand dollar to US dollar rate is however only 0.8 pct higher, 1 NZD converts into 0.8387 USD.

(Please note that your bank will access the above market rates but will sell on currency to you at another rate; this spread is where they make their money. However, an independent FX provider can also access currency at the above rates BUT will actively undercut the offer made by your bank, thus delivering you up to 5% more currency. Please find out more here.)

The outlook for the New Zealand dollar according to UBS

Analyst Geoffrey Yu at UBS has today suggested that any declines in the value of the New Zealand dollar merely serves to offer up a better entry point for those looking to buy the currency.

A note to clients released today says the high level of NZ interest rates will continue to drive demand for the NZD.

Indeed, further gains against the Australian dollar are increasingly likely, Yu says:

image 1

"Being short AUDNZD is one of our long-held trade recommendations. Despite seemingly stretched valuations, relevant data releases so far this week only reinforce our view that this trade has further to run. Data out of China looks close to peaking, while New Zealand’s house prices and the upcoming CPI print also point to a need for vigilance on the part of the RBNZ (though the headline prices are still well below target).

"Finally, the risks to the AUD from the RBA remain asymmetric, even after October meeting minutes: hard to obtain a less dovish
outlook henceforth, while the risks from currency strength may prove more pronounced as the cycle turns."

As mentioned, driving the NZ dollar outlook is the Reserve Bank of New Zealand, a central bank that not long ago admitted to intervention but has since allowed itself to be an isolated hiker even with global risks so pronounced.

"Considering the importance of AUDNZD in the REER basis itself, another move lower in the cross will test the RBNZ’s tolerance levels. Alas, we doubt there is much the central bank can do about the pair’s underlying driver: policy differentials between the RBA and RBNZ have been a one-way street since Q1 2012 and the correlation remains very strong," says Yu.

Last quarter the 1 year forward swap (in the 3m) in the RBA’s cash rate traded below its antipodean counterpart, and even though the spread has stabilised, UBS expect cyclical conditions to continue undermining AUD performance.

"The market has already priced in the prospect of a tightening move by the RBNZ in the coming few quarters, but the key is in implementation and what sector of the economy the central bank chooses to target. This is where we have seen the biggest surprise, as last week Governor Wheeler warned that if the current macroprudential measures in housing fail to ‘slow house price inflation, larger increases in the official cash rate would be required,'" says Yu.  

According to the UBS analyst:

"The AUD and NOK are the benchmarks for sceptics, but these two economies have huge competitiveness issues which are threatening a higher REER in both countries. If the RBNZ is more relaxed about labour costs and demand-pull inflation, a higher currency can depress inflation differentials and consequently the REER. The RBNZ’s G10 peers have tried this with mixed results, but smaller open economies have greater capacity to adjust.

"Even if the US debt debate threatens risk currencies, in NZD case we believe it would only offer better entry levels."