An increased risk appetite encouraged by lower-for-longer global interest rates has helped support the New Zealand dollar, BNZ currency strategist Jason Wong says.
A soft United States dollar amid a lack of urgency for Federal Reserve rate hikes had aided the New Zealand currency’s rise to US73c.
"The outlook for US monetary policy remains the key driver of the New Zealand dollar. Recent US data has been mixed and there has been no smoking gun for the Fed to deliver further rate increases."
Global economic risks and a lack of inflation drivers could keep the Fed on hold for an extended period, although the BNZ’s central forecast still embodied three Fed interest rate rises in the next 18 months or so, he said.
Risks around the New Zealand dollar were mixed.
On the positive side, the New Zealand economy was travelling well with a broadly-based expansion and plenty of growth left.
Dairy prices appeared to have started a long-awaited recovery, suggesting some upside to New Zealand commodity prices during the next 12 months, Mr Wong said.
Downside risks were more global in nature.
Global risk appetite was elevated and the lower-for-longer rates environment had encouraged risk-taking.
It would not take much for sentiment to sour and that would be negative for the New Zealand dollar.
"A hint of the Fed on the verge of tightening would do the trick."
China had been out of the spotlight recently, but the risks of a financial stability event in that country had not gone away.
It was a slow-burner risk that would ultimately end up negatively for the New Zealand currency, Mr Wong said.
New Zealand monetary policy did not have much bearing on the outlook for the dollar during the next 12 months.
The dollar had proved to be resilient to the 1.5% of official rate cuts so far.
Another 0.5%, already priced in, should not rattle the cages.
In a world of very low interest rates, yield spreads remained well in New Zealand’s favour and should continue to provide support to the dollar, he said.
Exporters exposed to the US dollar should consider lifting near-term hedging targets relative to previous expectations as the stronger-for-longer New Zealand dollar theme played out.
Forecasts
NZD/AUD
A flat cross-rate was projected for the next year with similar economic outlooks for New Zealand and Australia, Mr Wong said. BNZ forecasts suggested the cross would spend most of the time in an A93c-A96c range. Further out, there was scope for an appreciating cross-rate with an assumed move to parity in 2018. There was more scope for the Reserve Bank to cut rates rather than the Reserve Bank of Australia during the next six months but that outlook was already priced in. Exporters should try to hedge exposures on any dips.
NZD/GBP
The British pound had fallen significantly since the Brexit referendum and looked cheap among global currencies. Mr Wong was not convinced it had fallen by enough. A ramp-up in policy easing by the Bank of England and the prospect of a delayed exit from the European Union were negative for the pound. The longer the delay, the greater the economic uncertainty and lack of investment in the UK. Volatility
was likely to be greater than average and corporates should be opportunistic in their hedging.
NZD/EURO
The euro had held up well, considering the Brexit vote, and there had been little sign of spillover effects to date from a weaker British pound, Mr Wong said. The list of elections in Europe during the next 18 months was long, including the French presidential vote in May and German Federal elections about a year away. Europe ran a strong current account surplus and monetary policy had eased about all it could. Since the start of 2012, the New Zealand dollar had spent 80% of the time in a trendless range of Euro 60c to Euro 66c. Projections were for much of the same.
NZD/JPY
On a long-term historical basis, the Japanese yen remained a cheap currency, despite its strength this year, Mr Wong said. The Bank of Japan was undershooting its inflation target by a significant margin and was running out of policy options. Only a radical easing, such as helicopter money — the central bank directly underwriting the Budget deficit to avoid deflation — would help put the yen on a much weaker path. But such a radical move was unlikely. While the Bank of Japan would like a much weaker yen, the market was unlikely to deliver that outcome.
