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Economists at Capital Economics have raised their forecasts against the US dollar for both the Australian dollar and the New Zealand dollar, but have revised them up by more for the latter than the former.

Key quotes

“We have recently changed our view of the Chinese renminbi and other Asian currencies and now forecast that they will appreciate against the US dollar over the next couple of years. Given the strong trade links of China and the rest of Asia with Australia and New Zealand, we think that stronger Asian currencies will lead the aussie and the kiwi to fare even better against the US dollar than we had originally anticipated. After all, since the US-China trade war, the aussie and the kiwi have tracked the renminbi’s shifts against the greenback closely.”

“We think that the prospects are brighter for the New Zealand dollar than the Australian dollar. This is primarily because in our view the outlook for Australia’s key commodity exports is worse than that for New Zealand’s.” 

“We forecast the price of iron ore − whose surge earlier this year was probably a key factor behind the strengthening of the Australian dollar vis-à-vis the US dollar – to fall to $80 per tonne by the end of 2021, from around$120 currently. By contrast, we think that the prices of agricultural commodities, which make up most of New Zealand’s commodity exports, will grind a bit higher in the next couple of years, despite high stocks.”

“There is more scope for rates to be lowered in New Zealand than in Australia, causing relative interest rates differentials to move against the New Zealand dollar. In fact, we forecast that the RBNZ will cut its policy rate by 50bp to -0.25% over the next six months or so, while we project only a 15bp reduction in the RBA’s cash rate target to 0.10% in November and nothing thereafter. But to a large extent, both of those moves now seem to be discounted in the markets. 

“There is more room for additional asset purchases to be announced in Australia than in New Zealand. If, as we expect, the RBA announces additional purchases, we suspect that this would weigh somewhat on the Australian dollar vis-à-vis the New Zealand dollar.”

“Our new end-2022 forecasts are as follows, with current levels shown in brackets: AUD/USD at 0.80 (0.72) and NZD/USD 0.75 (0.66).”