The evolution of United States interest rates and the US dollar would be the main topic of interest for foreign exchange markets this year, Westpac currency strategist Imre Speizer said yesterday.
Since the United States election on November 8, the US dollar had outperformed almost all currencies and the consensus view was that was likely to continue for at least the next few months.
"In a year laden with risk events, we expect the New Zealand dollar to underperform the US and Australian currencies and outperform the Japanese yen, the euro and the British pound."
The New Zealand dollar/US dollar cross was volatile last year, covering a 10c range, although it ended the year only 2% higher than where it started, Mr Speizer said.
Momentum was negative at present and the dollar had the potential to probe lower into the US67c to US68c range during the next few months.
The main determinant this year would be the US dollar. A stronger US dollar and a weaker NZ currency was the consensus view and that made Westpac "slightly nervous", he said.
"The US fiscal impulse could disappoint, tighter financial conditions could slow growth and a mercantile trade agenda could include a weaker US dollar."
However, the base case was the Federal Reserve would have to lift interest rates twice in 2017 and twice in 2018 — consistent with market pricing — and the US dollar would strengthen.
Absent a strong US dollar, Westpac would be more bullish on the NZ dollar’s prospects, Mr Speizer said.
The NZ dollar hit a month-high yesterday as investors were disappointed US president-elect Donald Trump did not provide much detail on his spending programme in his first press conference.
The kiwi rose to US70.87 after the press conference. The US dollar index, the measure of the greenback against a basket of currencies, fell 0.5% after Mr Trump’s hour-long press conference, which was dominated by reports of Russian interference in last year’s presidential election and an intelligence report Russia had compromising information about the president-elect.
Investors were hoping for more details about Mr Trump’s planned spending on infrastructure and tax reform.
Mr Speizer said the kiwi ended 2016 little changed against the Australian currency. During the second half of the year, parity "whispers" were again heard in markets but, ultimately, the A97c to A98c range held.
"We expect that area to remain a significant barrier during the year ahead. Technically, there’s a case for a move lower during the next few months towards A92.8c."
Like the kiwi, the Australian dollar jumped following Mr Trump’s press conference.
The Australian dollar was trading at US74.45c immediately after the conference ended.
Mr Speizer said Mr Trump’s eagerly awaited press conference disappointed a market wanting information about fiscal policy, which led to the US dollar falling against the majors, including the aussie.
"It was not as market-friendly as the pro-growth acceptance speech he gave in November.
"Trump made a few references to ‘making American great again’ but if you wanted more detail on infrastructure spending plans, corporate tax reform, a tax repatriation holiday and the potential for border-adjusted taxation, then you would have been disappointed."
The New Zealand dollar was expected to continue rising against the euro this year, he said.
One weight on the euro was the European Central Bank’s decision to extend its asset purchase programme to at least December at a purchase price of €60billion ($NZ90billion) a month.
"We expect New Zealand interest rates to outpace those in the euro zone since the ECB will need to contend with elections in Germany, France, Netherlands and probably Italy next year, as well as Italian banking systems risks."
In contrast, the Reserve Bank of New Zealand was on hold. The next policy action was likely to be tightening, given the economy’s strong performance.
Against the British pound, the kiwi rose 22% in value last year, most of that after the Brexit referendum in June. In November, it made a post-float high of 61pence, last seen in 1974, when both currencies were fixed. That level could be exceeded this year, Mr Speizer said.
Until Brexit was triggered, uncertainty would linger.
