NZD/USD: There is scope for mild further appreciation

The Kiwi has had a challenging first half of the year, and it is back in the low-0.60s. Economists at ANZ Bank discuss NZD/USD outlook.

Carry and fair value to take centre stage

“If the Fed funds rate does go up one more time, it’ll get close to where the OCR is. It won’t surpass it, but we are certainly not talking about a situation where the NZD has significantly higher carry than the US. For the moment there is small positive spread in NZ’s favour, but what’s more important is that the NZD is the only currency for which that’s the case. That might not mean a lot in NZD/USD terms, but if anyone does want to go short the USD, then the Kiwi is an obvious currency to pick. The NZD’s advantage over other currencies may drive outperformance on crosses too, which may, in turn, feed into NZD/USD strength, even if to a lesser extent.”

“Our forecasts tend to be guided by fair value, and at the moment, our model puts NZD/USD fair value at around 0.6550. We are thus closer to fair value than we have been for a while. However, notice how our forward estimates of fair value (which are based on expectations for interest rates and commodity prices and the like) are lower (at around 0.6270 two years out).”

“At the moment, when we apply a one standard deviation band, we get a 0.60 to 0.71 range. Right now, we are inside those bands. But NZD/USD is below both our spot and forward estimates of fair value, and closer to the lower standard deviation band than it has been for some time. As a gravitational pull factor, that suggests there is scope for mild further appreciation.”

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