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.”
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