FX Watch – Initiate short NZD

by: Roy Teo

FX-watch-Initiate-short-NZD-30-Mar-15.pdf ()

We have added the New Zealand dollar (NZD) to our short conviction list of currencies against the US dollar (USD) as we judge that the recent recovery in the NZD is inconsistent with economic fundamentals. The NZD is the most overvalued currency among the major currencies. The strength in the currency is likely to trigger more aggressive intervention from the Reserve Bank of New Zealand and weigh on tradable inflation. Furthermore, the relative strength in the NZD against the Australian dollar is also expected to negatively impact exports to Australia, its second largest export destination. We maintain our below market consensus NZD/USD forecast of 0.68 by the end of this year.

Initiate short NZD/USD view at 0.7540

We have decided to put the NZD on our high conviction list as a short versus the USD at 0.7540 for reasons elaborated below. Furthermore, financial markets are underestimating the magnitude of rate hikes in the US this year in our view. We judge that the recent recovery in NZD/USD just below 0.77 on 24 February is over and prices are expected to head lower towards 0.68 by the end of this year.

 Overvalued NZD inconsistent with export prices

Within the major currencies in our coverage, the NZD is the most overvalued currency. According to purchasing power parity, the NZD is overvalued by more than 20% against the US dollar. Furthermore, the recent strength in the NZD is also inconsistent with New Zealand’s key commodity export prices.


Strong NZD to weigh on exports and inflation…

The NZD has rallied to record levels against the Australian dollar. This is expected to impact exports to Australia, New Zealand second largest export destination. In addition, the strong NZD is also expected to result in tradable inflation remaining in negative territory longer than expected. This will help to negate the rise in non-tradable inflation, allowing more flexibility for monetary policy to remain on hold.


… and to trigger intervention by the RBNZ

We think that the Reserve Bank of New Zealand (RBNZ) had intervened in the currency market to weaken the NZD in recent days. The RBNZ stated that they net sold NZD 13m in February when the NZD trade weighted index (TWI) was at lower levels. A more aggressive action is likely to be embarked going forward as the recent strength in the NZD TWI was around levels when the RBNZ net sold more than NZD 500m in August last year to weaken the exchange rate.