NZD/USD: Downside risk in the short-term - BNZ

A strong NZD recovery in November against a backdrop of weaker risk appetite and flat-to-softer NZ commodity prices, sees the currency looking rich on fundamentals, although not significantly so, according to the BNZ Research team. They see global macro headwinds persisting over the next 3-6 months, suggesting more downside than upside risk for the NZD/USD.

Key Quotes: 

“Part of the NZD’s recovery has reflected a more positive vibe on the US-China trade war. We see a good chance of some sort of trade deal being reached in early 2019, that won’t necessarily address the multi-dimensional underlying tension between the two countries, but at least might get tariff threats away from the headlines.”

“Global economic headwinds tend to be a negative force for the NZD and weaker growth dynamics currently in China and across Europe need to be monitored carefully.”

“Through the next year the outlook for US monetary policy is murkier. We are sympathetic to the view that the rate hike cycle will see a pause in early 2019, something the market now entertains. But the impact of a less aggressive rate hike cycle has had little impact on the USD so far, as the US economy outperforms. Still, the bias for NZ-US short-term rate differentials remains to the downside, as RBNZ rate hikes remain a distant prospect”

“Weaker NZ dairy prices have been a negative force for the NZD over the past six months, but we are more constructive on the outlook and this, along with weaker oil prices, should support NZ’s terms of trade.”

“Our forecasts for the next 3-6 months are pitched around a central forecast of USD0.67-0.68. Against a backdrop of a slowing global economy, we’d expect to see some resistance near 0.70 and importers should be looking to lock in some hedging on any positive rallies towards and above that level.”