NZD is not significantly over-valued - BNZ

Jason Wong, Currency Strategist at BNZ, suggests that their short term fair value model estimate has pushed up to 0.7040 on higher risk appetite and commodity prices and, with the weaker NZD, the valuation gap has closed to within 1%.

Key Quotes

“The best chance for the NZD to move sub-70 cents is for further gains in the USD, fuelled by expectations that the Fed will resume tightening policy again. At present, a tightening by December is about 50/50 priced, while a full tightening isn’t priced until November next year.

This week’s RBNZ Monetary Policy Statement is not expected to have a sustained impact on the NZD. The intra-meeting economic update in late July means that the market has already moved in advance of this week’s Statement. A 25bps rate cut is fully priced and a further one and half rate cuts are priced in by the market. We’re not even convinced that a surprise 50 bps rate cut would have much lasting impact on the NZD. Last week’s price action in the AUD post the RBA rate cut highlighted the lack of link between local rates and the local currency. We’ve recently written about the weaker relationship this cycle between rate differentials and the currency.

The RBNZ could well repeat the line that “a decline in the exchange rate is needed”, but the market will rightly ignore this line. Our own modelling work suggests that the NZD is not significantly over-valued. On our purchasing power parity model the TWI is less than 5% “over-valued”, NZ’s current account balance is much better than average, and business confidence (even for exporters) is doing just fine. Certainly we can’t see any evidence for the NZD “needing” to decline.

There are only second-tier local data releases this week. The international data calendar is also fairly light. Much of the action occurs on Friday, with a number of China activity indicators released and in the US retail sales data are the highlight. Overall, there’s not a lot to excite foreign exchange markets this week and the Northern Hemisphere holiday season is another reason to expect light flows and modest price action. The Olympics will be a welcome distraction.”