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On Thursday, the NZD/USD pair is falling on the back of risk aversion, trading slightly above 0.6700. Analysts at MUFG Bank, forecast the NZD/USD at 0.6600 by the end of the third quarter and at 0.6700 by year-end, rising to 0.6900 by the second quarter of next year. 

Key Quotes:

“The New Zealand dollar performed poorly through much of August before advancing notably in the final days of the month, despite the aggressive action by the RBNZ at its meeting in August. The increased size of the QE from NZD 60bn to NZD 100bn was more aggressive than anticipated while the RBNZ was also more explicit about the prospect of additional monetary easing ahead, including negative rates. Other measures were in “active preparation” according to the statement and included a negative OCR. One factor in being more aggressive was the fact that RBNZ purchases could be larger than originally anticipated without disrupting market functioning. The escalation of COVID in August also raised market expectations of additional easing being implemented. The aggressiveness was also a surprise given the RBNZ raised its GDP projections for Q2 2020 from -21.8% to -14.3%.”

“We suspect the actions of the RBNZ are in part anticipation of the economy not being hit as severely as elsewhere and the desire to thwart NZD gains given the low level of inflation. The RBNZ expect annual inflation to drop to 0.3% next year, well below the 1%-3% target band and hence NZD appreciation would raise the prospect of outright deflation.”

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