NZD/USD: Bottom in Commodity Prices to Cap Downside – Danske Bank
Jens Nærvig Pedersen, Senior Analyst at Danske Bank, suggests that the net immigration continues to be supportive for real economic activity in New Zealand, which is progressing relatively steadily despite rising global economic woes.
“The low CPI inflation should also be viewed in this regard. Falling commodity prices are another factor weighing on inflation. Significantly, inflation declined to 0.1% y/y in Q4 – the lowest level since 1999.
Monetary policy. The RBNZ cut its policy rate by 25bp to 2.25% in March. With inflation currently at the lowest level in 16 years and below RBNZ’s inflation target of 1-3% the key worry for RBNZ is that inflation expectations become unanchored, which would make it even more difficult to meet its mandate. Consequently, the market is looking for another 25bp cut in H2 2016. In our view, the risk is for RBNZ to cut in Q2.
Dairy prices remain low following a decline since the beginning of the year, which is a key worry for the agricultural sector. The change to China’s one child policy will likely support demand from China for New Zealand dairy products in the medium term. La Niña weather in H2 16 could disrupt agricultural production this year.
Risks. The NZD remains exposed to global risk sentiment and commodity prices: should the former make a turn for the better and/or if a strong La Niña fuels upward pressure on food prices, the RBNZ may adopt a neutral stance.
The March rate cut from RBNZ reversed the course for NZD which has gained support from waning inflation expectations and improvement in global risk sentiment. However, with the risk of a global economic downturn fading and that commodity prices have bottomed, we look for NZD/USD to hold on to recent gains. Towards the end of the year, stronger global economic growth and higher commodity prices will support a higher NZD/USD, around 0.70.”
(Market News Provided by FXstreet)