NZD/USD: To persist in the highs 0.60s, rather than averaging 0.70 over the next 12M

According to the BNZ Research Team, the trade war between the US and China, is a key risk event for the New Zealand dollar.

Key Quotes:

“We have nudged down by 1-2 cents our NZD forecasts for the coming year, largely a reflection of negative domestic forces. Trump’s next move on Chinese import tariffs represents a key risk event (up or down) for the NZD next month.”

“NZ’s GDP growth is stagnating at around trend, at best. Slowing population expansion is acting as a significant moderating factor and is already playing a part in slowing private consumption and employment growth. Weak business sentiment, if sustained, will also prove problematic with anecdotal evidence suggesting investment decisions are being postponed. It was this focus on the softer growth outlook that triggered the RBNZ to adopt a more dovish-than-expected policy stance in its recent Monetary Policy Statement.”

“We have pushed out our expectation of the first tightening in monetary policy to later in 2019, still a year away. These changes in outlook on both domestic growth and rates, alongside a slightly softer terms of trade outlook, have resulted in a 1-2 cents shaving in our outlook for the NZD.”

“We see it persisting in the high 0.60s now, rather than averaging around 0.70 over the next 12 months. That said we could have easily made a more significant revision (to the downside) but that seems futile ahead of resident Trump’s next move on Chinese tariffs.”

“After public consultation ends on 5 Sept., Trump will decide whether to (i) impose tariffs on $200bn in Chinese imports, which China would retaliate against, and open up the possibility of tariffs on all Chinese imports, a much greater threat to the global outlook, or (ii) keep tariffs unchanged and focus on negotiating with China. Scenario one could easily see the NZD lurch down further, with 0.63-0.64 entirely plausible. The second scenario could easily see the NZ recover some recent losses. Our central forecast assumes the more positive outcome, but we are not confident in that call.”

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