NZD: Patience required to embrace bullish view for the near-term - TDS

Analysts at TDS explain that the contrast between the medium-term outlook for the AUD and the NZD has grown, although patience is required in the near-term before they can embrace a bullish view on the NZD.

Key Quotes

“While the domestic backdrop is positive, RBNZ Governor Wheeler’s stubborn dovishness is an important offset until his retirement in September. This is likely to maintain volatility in the NZD.  The dislocation between how the economy is tracking and RBNZ resistance to shifting to a tightening bias is a recipe for instability.”

“With above-trend growth, a notable terms-of-trade improvement, and inflation already at the RBNZ’s 2% target, we do not think current RBNZ communications reflects the strength of the domestic economy.  However, while we wait for the leadership transition, markets are likely to anticipate a move higher in rates over the next several months. Not only will this put the NZD in a stronger position on its own merits, but it will also help reinforce its standing against the lower-yielding currencies.  With the Fed expected to take policy rates steadily higher from here, the NZD will soon be the only other G10 currency with a base rate above the U.S.”

“The NZD has been confined to a fairly tight trading range against the USD over the last year, although there is a little more freedom of movement in keeping with its less-liquid status. Within this, the $US0.685 level has remained a key pivot, the 50% Fibonacci-retracement level of the trading range defined by the 10 July 2014 high ($US0.8836) and the 23 September 2015 low ($US0.6237).  We look for the NZD to end the year around $US0.71, seeing AUDNZD again retreat towards 1.03.”