NZD: Fading star – ANZ

The NZD should be elevated but the real questions are how elevated, and for how much longer, according to Cameron Bagrie, Research Analyst at ANZ.

Key Quotes

“We favour fading strength; the good news story is already well factored in at current elevated levels.”

“A bias to the downside

New Zealand’s booming terms of trade and still-solid economic momentum justify an elevated NZD. Even so, the real questions are; how elevated should it be and for how long? Valuations provide neutral signals.”

“We have a mildly negative bias towards the NZD. Key reasons include:

• New Zealand’s relative economic position is slipping as the cycle matures and momentum picks up elsewhere around the globe. Housing activity – a key cyclical barometer – is slowing. 3% GDP growth is on offer; not 4%, and financial conditions are flagging 2%.
• We continue to expect an imminent turn in the global liquidity cycle, which will present challenges for risk currencies/assets. Abundant official and market liquidity (driven by low risk aversion) has been a key source of support for peripheral currencies. This cycle has peaked and the major central banks are inching closer to the exit door. 
• US economic data is stabilising.
• While the NZ-US interest rate differential has been fluctuating from week to week, the trend is for closure.  A meagre 65bps separates 3mth bill rates; the gap was nearer to 350bps less than three years ago. Not only is the gap closing, the pick-up relative to the US base rate is narrowing too.”

“We’ve pushed out our expectations for the first RBNZ hike from May 2018 to November 2018. That’s in line with market expectations, though we have a lot of sympathy for the view that the OCR might be on hold for another three years at least.”

“Looking at local-specific factors, markets appear to be taking a relaxed view of the upcoming election. That’s hardly surprising given the incumbent government’s high polling. Yet the reality of proportional representation is that is doesn’t take much of a shift to change the election outcome. That said, by global comparison, New Zealand politics is tame.”