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New Zealand Dollar Heading to US$0.64

The New Zealand dollar will be worth only 64 US cents within the next twelve months, say economists at Westpac.

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NZD-USD 2 year chart

The currency’s 9 percent decline from Monday afternoon’s rate of 70.4 cents will be the result of New Zealand’s economy underperforming its peers, the bank says. Versus the Australian dollar, the kiwi will decline to 90 cents by year-end.

In its latest Weekly Commentary, released on Monday, Westpac cite soft retail sales data, declining construction activity and a prolonged period without growth in new home builds as reasons for a further decline in New Zealand’s GDP growth to 2.8 percent (data for the March quarter to be released on June-21); this would match current growth in the US and fall behind growth in Australia, now 3.1 percent.

New Zealand is now merely a “support act,” writes Westpac, having once been a “rock star.” As recently as the fourth quarter of 2016, New Zealand’s economy had been growing at a standout 4 percent.

Among issues exacerbating the slowdown in growth will be net migration. Robust migration in recent years had provided “a powerful boost to demand and productive capacity, reinforcing…other factors that were supporting growth,” but migration, now at +67,000 annually, is set to “slow substantially over the next few years.”

“We expect that the New Zealand economy will continue to underperform its peers for the next few years and this will have important implications for both net migration and the NZ dollar.”

As for the RBNZ, which sent the kiwi sharply lower in May after it failed to rule out an interest rate cut, it will be “on the sideline for some time yet,” Westpac believes, thereby aligning itself with the general analyst consensus on future monetary policy.

Importantly, interest rates in New Zealand are expected to fall below US rates this year – a development that PricewaterhouseCoopers has described as a “massive change in market conditions [offering] a disincentive to invest in New Zealand dollars.”

As for this week’s trading, like all currencies, the New Zealand dollar will have a lot to contend with. Major events on the economic calendar include the meeting of Donald Trump and Kim Jong-un, US inflation and retail sales data, and an expected interest rate hike by the US Federal Reserve. For the kiwi-euro cross, there’s also the not-so-small matter of a meeting of the ECB, at which it’s conceivable that a game-changing decision on European monetary policy could be announced. For kiwi-Aussie, there’s Australian employment data. Needless to say, volatility in New Zealand dollar exchange rates could be elevated this week.

 

 

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