NZD/USD to be driven buy Fed action, longer-term forecast at 0.73

Thu Lan Nguyen, FX Strategist at Commerzbank AG, on New Zealand economy and Loonie

Last year New Zealand exported almost $9 billion of goods to Australia, creating 18 cents of every dollar of export revenue New Zealand received, according to the New Zealand Institute of Economic Research. Its top bilateral exports are oil, gold, wine and cheese. What economic impact do you foresee from the strengthening NZD against the AUD in the future? What effect will it have on the tourism sector in particular?

The comparatively strong Kiwi will dampen exports to Australia, which is the second biggest export market after China for New Zealand. Australia is also the most important country for tourism in New Zealand, which makes up roughly 7% of New Zealand GDP. Hence, the strong New Zealand Dollar, no doubt, is dampening the economic outlook. However, the RBNZ is well aware of this and has pointed out that a downward correction of the real exchange rate is needed. In case Kiwi strength should become excessive, it is highly likely that it would cut its key rate.

New Zealand posted a small trade surplus of just $50 million in February with dairy exports down heavily, especially to China, whereas economists expected a monthly surplus of about $350 million. In general, exports to China have melted down last year as dairy product prices plunged. Do you expect the numbers to fall even lower in the future and at what cost for the New Zealand economy?

Much depends on the development of the New Zealand Dollar, which has to compensate for the slowdown in China and lower prices of important export goods. In case the Kiwi weakens as we expect in the forthcoming period, the negative impact may be reduced.

What will be the major headwinds for the Kiwi in the Q2 of this year?

As we expect the Reserve Bank of New Zealand to remain on hold for the rest of the year, the main driver for the NZD/USD currency pair is going to be the Fed action. Most crucial is not the timing, but the pace of prospective rate hikes by the US central bank, which will in turn determine the pace of the Greenback appreciation. A further slowdown of the Chinese economy may also contribute further headwind to the Kiwi, as it would increase the risk for a rate cut by the RBNZ.

What are your forecasts for AUD/NZD, EUR/NZD, NZD/USD and GBP/NZD for the shorter and longer-term period?

We expect to see the AUD/NZD trading at 1.04 by the end of the second quarter this year. As far as the EUR/NZD is concerned, we see the pair heading to 1.51 for the same period of time. We anticipate the NZD/USD to trade at 0.73 levels and 2.03 for the GBP/NZD for Q2 of 2015.