Jane Foley, Senior FX Strategist at Rabobank, points out that NZD is the worst performing G10 currency on a 1 day view and a drop in a widely watched business confidence survey to a 7 month low has reinforced the expectation that the RBNZ will stick to its steady interest rate policy at this week’s policy meeting.
Key Quotes
“The weak tone of business confidence has also enhanced the sensitivity of the NZD to an escalation in US/China/EU/Canada trade wars. The drop in the value of NZD/USD since the middle of April has pushed the currency pair close to our 12 mth target. Consequently we have revised down our 12 mth forecast to NZD/USD0.65 from 0.67.”
“Within the June ANZ business sentiment survey, 48% of firms expect a deterioration in business conditions vs. 9% who sees an improvement.”
“The tone of the survey suggests that a more cautious outlook may be adopted by the RBNZ this week.”
“It is likely that fears over the potential impact of trade wars was a major component behind the drop in business confidence and this risk will likely be debated by the MPC this week.”
“Despite the rise in anxiety about the impact of a trade war, there is little firm evidence that New Zealand exports have already been impacted by the new tariffs operating between the US, China, the EU and Canada.”
“Moreover, slower growth in China as a result of trade wars bodes poorly for overall demand of New Zealand exports. Lower export earnings could feed back into the domestic economy through lower household incomes and weakened consumer demand.”
“Partly offsetting the news about trade wars has been the official launch of trade talks between the EU and New Zealand. NZ Trade Minister Parker and EU Trade Commissioner Malmstrom formally launched the dialogue earlier this month promising more choice, new jobs and the possibility of a 50% rise in the trade of goods.”
“That said, several hurdles remain in place.”
“Given the cloud of uncertainty about trade wars and the associated risks to both world growth and risk appetite we expect NZD/USD to remains biased to the downside.”
“We have revised down our 9-12 mth forecast to NZD/USD 0.65. In the coming weeks, the November 2017 low near NZD/USD 0.6781 is likely to offer technical support.”
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