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The downside pressure on the New Zealand dollar could depend on China’s trade relationships while the best chance of a rally in NZD/USD would be a negative sentiment around the US dollar, according to the NAB FX Strategy Team.

Key Quotes:  

“The NZD is currently fairly priced at 0.68 and we still see the NZD anchored about 0.67-0.70 this year, with brief excursions outside that range. Downside risks include weaker than expected global growth, led by China and Europe. An assumed thawing of US-China trade tensions and strong NZ terms of trade are
supporting factors.”

“The NZD is currently supported by the recovery in risk appetite and commodity prices. World dairy prices are up nearly 20% from their lows of late last year. On our view of only a modest global economic downturn, NZ’s terms of trade can remain at a historically high level and help support the NZD this year.”

“NZ interest rates are historically low relative to US rates and are a source of downward pressure on the NZD.”

“The best chance of a sustained topside break would be if sentiment for the USD turned sour. This could occur if focus on its “twin deficits” re-emerged while we also see the USD as over-valued against all the majors.”

“On the other side of the ledger, downside pressure would increase if we are wrong on thawing US-China trade tensions. A new emerging risk is a deterioration in NZ-China relations that has recently got media attention. For all we know, this could be a storm in a teacup but China could impart significant economic damage to NZ and the NZD if the country looked to rebalance its imports away from NZ.”