Analysts at Amplifying Global FX Capital suggests that in a rising global yield environment, where global investors lose interest in squeezing every last bit of juice from somewhat higher yielding assets, the NZD should under-perform.
“The NZD is one of the most over-valued currencies compared to its long-run average real effective exchange rate and its historically low yield advantage.”
“Indeed, in recent months, the NZD has become more highly (negatively) correlated with US yields. But of course, US yields have fallen in the last two weeks as the Fed emphasized a gradual policy tightening cycle and Trump’s progress towards key policy goals stalls, contributing to a fall in the USD and recovery in NZD. Global growth indicators continue to improve, including export performance in Asia. The benign US Fed outlook, combined with improved growth indicators, has seen a further sharp rise in Asian equities and currencies. Buoyant global risk appetite is spilling over to stronger commodity currencies, including the NZD.”
“New Zealand’s Q4 GDP reported last week was much below expected, suggesting that the RBNZ may sound more dovish at its policy statement this week. However, GDP is likely to bounce back this year. Underlying demand in the NZ economy remains strong, global conditions have improved, and the NZD is somewhat weaker since February. On the other hand, dairy prices have weakened and detract from an otherwise improved outlook for growth and inflation in New Zealand. The RBNZ will be wary of changing its language too much in its policy statement this week for fear of pushing the exchange rate higher.”