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Analysts at Rabobank, see scope for further correction in NZD/USD on a three to six month perspective, partly on the view that the recent reflation trade will run into headwinds and partly due to the risk that negative interest rates will remain a prospect for the Reserve Bank of New Zealand (RBNZ).

Key Quotes: 

“A low inflationary backdrop suggests the need for accommodative monetary policy settings and a preference for a weak currency. When inflation is soft across the board and interest rates are also at or close to record lows in many countries, there is a recipe for currency wars. In the past the RBNZ has been known to use the element of surprise on the pace of interest rates cut. It did the same with the news last July that it was exploring unconventional policy measures. This has resulted in some success in pushing the value of the NZD lower. Today’s comment from the RBNZ that “members noted that the exchange rate has appreciated since the May Statement, dampening the outlook for inflation and reducing returns for New Zealand exports”, should thus be taken seriously by the market. Unlike the RBA, the RBNZ has left the option of a negative policy rate on the table.”

“We see risk of a pullback to the NZD/USD 0.60 area by year-end. In view of the huge reflation trade in recent weeks, we have revised this forecast up from 0.57.”