The New Zealand government piled misery onto the New Zealand dollar on Wednesday with its announcement that it had revised downward its forecasts for economic growth this year and next. Treasury officials said that growth for the year to June 2017 would likely come in at 2.6%, from earlier expectations of 3.2%, and have forecast 2018 growth of 3.5%, down from May’s forecast of 3.7%.
“Overall, we’ve seen a slightly softer growth story but not markedly, just slightly softer over the four-year track,” said New Zealand’s finance minister Steven Joyce.
The new forecasts come just one month before New Zealand’s general election on September 23rd and add interest (for those economically inclined) to what is already a competitive race between the incumbent National Party and the opposition Labour Party.
The New Zealand dollar fell on the news to a fourteen-month low against the euro (0.614), to a thirteen-month low against the Canadian dollar (0.909), to a sixteen-week low against the Australian dollar (0.915) and to an eleven-week low against the Singapore dollar (0.984). Against the world’s reserve currency, the US dollar, the ‘kiwi’ fell to 0.722 but it remains above critical technical support at 0.72.
The New Zealand dollar has come unstuck in August, following a stellar period between May and July, in which the currency gained nearly 10% against the US dollar and 8.5% against the yen. With the RBNZ insisting via its official projections that New Zealand’s cash rate – currently at a record low – isn’t going anywhere until late 2019, and with dairy prices falling in four of the past five auctions, there seems little reason for short-term NZD optimism.
The current decline in major NZD exchange rates will of course make the RBNZ happy. The central bank expressed their desire two weeks ago for New Zealand’s currency to fall in value in order to help with inflation. “A lower New Zealand dollar is needed to help deliver more balanced growth and increase inflation,” said the bank’s governor, Graham Wheeler, on August 10th.
While today’s fiscal update did have some positives – the Treasury doubled its estimate for this year’s budget surplus, for instance – these are seemingly unable to affect New Zealand dollar exchange rates. “That good news is already widely known and understood,” said ANZ economist Cameron Bagrie.
Looking forward, the New Zealand dollar is likely to trade quietly until the Jackson Hole symposium later this week. Over a longer term, ANZ’s Bagrie continues to favour fading kiwi strength. By year-end, NZD/USD will be trading at 0.71 according to the median estimate from July’s RBNZ survey of business managers.
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