Analysts at BNZ, explained that if the US yield curve accurately portended a US economic recession, then they would significantly downgrade their NZD projections. On the other side, in the case of a no recession and as the year progresses, they see more positive influences on the NZD prevailing and a higher trading range emerging.
Key Quotes:
“There are conflicting forces on the NZD at present.If we were to believe that the current US yield curve accurately portended a US economic recession, then we’d be significantly downgrading our NZD projections. At this juncture, there is enough doubt to maintain our constructive view of the US and global economic outlook. Trends in credit spreads and commodity prices are not currently supporting the recessionary outlook view. We find it difficult to suggest that the US economy is on the precipice of an economic recession, when growth indicators aren’t that bad and the US monetary policy tightening cycle has drawn to a close, with short rates barely at neutral. US-China trade tensions no longer seem to be a risk to the outlook, assuming that a trade deal is agreed over the next month or two. China has been proactively stimulating its economy with easier monetary and fiscal policy in order to stabilise growth. And compared to expectations at the beginning of the year, rate hikes no longer seem to be a threat across most of the developed world.”
“A tug of war on the NZD is operating, allowing the NZD to track sideways in a fairly narrow range. Until there is more clarity on the outlook, this state of affairs is expected to continue. As the year progresses, we see more positive influences on the NZD prevailing and a higher trading range emerging. If we’re completely wrong on the global economic outlook and recessionary conditions do in fact emerge, then our NZD projections would need to be slashed.”
“Yesterday’s surprise move by the RBNZ doesn’t materially change our view, coming hot on the heels of more dovish tilts by other central banks.”
“Market moves in NZ and US rates have been NZD supportive over the past six months. Rate cut expectations have become more pervasive for both NZ and the US and it is relative interest rates that matter for currencies.”
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