NZD/USD year-end and Q1 2019 target at 0.65 - BNZ

According to analysts at BNZ Research, see the NZD/USD pair moving to the downside in the short-term amid risk aversion and lower NZ commodity prices.

Key Quotes: 

“Of note has been the NZD recovery against a backdrop of a strong USD. The widely followed DXY USD index is currently less than 1% off its recent 18-month high. Renewed weakness in global equity and credit markets and a further plunge in oil prices have helped support the USD – its negative correlation with risk appetite and oil prices remains intact. The reason the USD hasn’t been even stronger probably reflects the market’s attention on the Fed’s outlook for monetary policy. Over the past fortnight the January 2020 Fed Funds contract – the best proxy for market pricing of Fed policy through to end-2019 – shows a 19bps fall in yield to 2.72%.”

“The downward channel for NZD/USD from April through to October looks to have been arrested, even against a backdrop of a “strong” USD. Positive domestic forces such as better data and upside to NZ rates during a time when the US monetary policy outlook has become more clouded have helped.”

“Our short-term fair value model estimate has fallen to 0.6650, driven down by lower risk appetite and lower NZ commodity prices, taking the NZD from super-cheap to modestly over-bought. Despite a trade war ceasefire removing some potential nearterm downside risk to the NZD, our message would be to tread carefully.”

“Our year-end and Q1’19 targets of 0.65 assumed a deteriorating US-China trade picture. There is obviously some upside risk to these targets if Trump has turned over a new leaf and wants a quick deal. A ceasefire might well last several months and would remove a key source of near-term downside risk to the NZD. But we are also guided by our short-term model estimate that says the NZD is looking a touch over-bought at current levels.”