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Economists see more pain in store for the New Zealand dollar

Monday 13th August 2018

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The New Zealand dollar was roiled by the Reserve Bank’s surprisingly dovish stance last week and economists say there is more downside to come as US interests rates rise and the global trade outlook remains uncertain. 

The central bank kept the official cash rate at a record low 1.75 percent on Thursday and governor Adrian Orr said he now expects to keep it unchanged at least a year longer than previously forecast and could even opt to cut rates, as he seeks to jump-start economic growth. 

The spectre of the US-New Zealand rate differential moving firmly in favour of the US - where the federal funds rate is in a band of 1.75 percent to 2 percent - weighed heavily on the kiwi. 

“The RBNZ made it clear last week that it is concerned about downside risks to the growth outlook, and entirely unconcerned about the looming cost-push lift in inflation,” said ANZ Bank New Zealand chief economist Sharon Zollner.

The kiwi dollar plunged after Orr’s statement, ending more than 2 percent lower on the week in Wellington at 66.10 US cents. It hovered at its lowest level since March 2016 Monday at 65.86 US cents as Turkey's economic woes had investors scurrying for cover. 

ANZ senior macro strategist Phil Borkin said he now sees the kiwi trading at 62 US cents at the end of the year versus a prior view of 67 cents. The trade-weighted index is seen at 65 versus a prior view of 70.2. The TWI was recently at 71.54. 

His forecasts are more bearish than the central bank itself, which sees the TWI averaging 72.9 in the December quarter. 

Borkin noted that while the weaker New Zealand dollar is a plus for exporters and a sustained depreciation can also support import-competing firms “it should also be remembered that the exchange rate is a two-sided coin: higher import prices will dent consumers’ real spending power.”

ASB Bank chief economist Nick Tuffley said he expects the kiwi to trade at 68 US cents by year-end “though risks are skewed to a lower outcome given the RBNZ’s recent impact on the currency.”

Imre Speizer, head of NZ strategy at Westpac Banking Corp, also lowered his view and now expects the kiwi to trade at 64 US cents “or lower” versus a prior forecast of 66 US cents by the end of the year. He sees the currency at 64 US cents by mid-2019, and expects the trade-weighted index to be 70.50 or lower.

Bank of New Zealand senior markets strategist Jason Wong said BNZ’s FX forecasts are now under review given escalating trade tensions. Its year-end forecast currently sits at 70 US cents.

“The reason it is now under review is that US-China trade tensions have escalated," he said. "It’ll all come to a head in early-mid September when (US President Donald) Trump decides whether or not to impose the proposed 25 percent tariff on a further $200 billion of Chinese imports.”

If those tariffs don’t go ahead the New Zealand dollar can recover from its “current depressed level,” he said. If “suddenly all of Chinese imports come under threat then NZD will head lower.”


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