New Zealand Dollar Forecast post-RBNZ: Lower Ahead of Sustained Long-Term Recovery

We take a look at where the NZ dollar stands in the wake of the surprise decision by the RBNZ to cut interest rates.

If you were the governor of a central bank and you wanted the most ‘bang for your buck’ you will have to catch markets by surprise.

If you want to lower the value of your currency and interest rate yields you cut rates when markets are least expecting it, and/or, you cut harder and faster than markets are expecting.

Reserve Bank of New Zealand Governor Wheeler knows this, and that is why he cut interest rates this March, just as markets were not expecting the move.

The cut worked with the New Zealand dollar falling 2% in the wake of the news.

There has been heavy criticism of Wheeler from some corners of the analyst community; of course some analysts will be peeved that they were caught wrong-footed by the RBNZ, but a lot of the time central banks do need to play a game of smoke and mirrors.

Forecasting a Lower New Zealand Dollar

Markets now know that the RBNZ is serious when it comes to achieving lower interest rates and a weaker currency.

As such those analysts who have forecast a weaker NZD in the near- to mid-term have been emboldened,

“We confirm our expectations for a weakening of the New Zealand dollar in the near term, towards NZD/USD 0.62-0.60 on a 1m-3m horizon,” says Luca Mezzomo, Chief Economist at Intesa Sanpaolo in Milan.

Mezzomo says is the time horizon on which the RBNZ may implement another interest rate cut, in full divergence compared to the Fed, which, by contrast, should resume hiking rates between 2Q and 3Q.

Citi Economics now expect a further 25 bps cut in April for a new low of 2.00%.

“Once there, Governor Wheeler is likely to provide qualitative guidance that further policy easing may be required though Citi does not expect the OCR to plunge further,” say Citibank.

From a strategic scenario Citi reckon betting against the New Zealand dollar is best done using the Australian dollar:

“A clear negative signal for NZD from the RBNZ though the cleaner play is via the AUDNZD cross than against USD even as NZDUSD collapses from 0.6790 to 0.6650/40 on the decision.

“The immediate focus now lies on the AUDNZD cross that has broken resistance at 1.1000 and could potentially be setting up for a move higher toward 1.1400 and maybe 1.1500/1.1600 whereas dips, if seen, would likely be bought from 1.1180.”

Longer Term Recovery

In the longer run the outlook is almost unambiguously positive for the NZD, all things equal.

“We stick to our gradual recovery scenario, mostly on the back of the excellent pace of growth expected in the next two years,” says Mezzomo.

Alongside the downside revision of inflation, the RBNZ has revised upwards its growth projections, from 2.4% to 3.3% in 2016 and from 3.0% to 3.2% in 2017.

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