New Zealand Dollar Outlook: Eventual NZD/USD gains say ANZ Analysts

January 24, 2024 - Written by John Cameron

STORY LINK New Zealand Dollar Outlook: Eventual NZD/USD gains say ANZ Analysts

China Hopes Rescue the New Zealand Dollar, GBP/NZD Exchange Rate Retreats from 2-Month Highs

The New Zealand dollar initially remained under pressure on Tuesday amid another round of disappointing economic data and rate-cut speculation.

Reports that the Chinese authorities were set to launch a support package for Chinese equities triggered a reversal later in the session with the Australian and New Zealand dollars making gains.

The Pound to New Zealand dollar (GBP/NZD) exchange rate posted 2-month highs just below 2.0950 before a retreat to 2.0890.

The Chinese Shanghai index recovered from 5-year lows. According to Neo Wang, managing director for China research at Evercore ISI; “It sounds like something had been readied in response to the recent equity rout. The market was poor enough to warrant such elevated attention — China cannot afford to see A-shares sinking toward the Lunar New Year holidays.”

Christopher Wong, currency strategist at OCBC commented; "The (China) news has triggered risk proxies, including the Australian dollar, New Zealand dollar higher."

He added; "It remains to be seen if this is just talk but if it does materialise sooner than later, then risk proxies can trade higher."

The New Zealand data releases, however, continued to cause concern.

The PMI services-sector index dipped to 48.8 for January from 51.1 previously and remained well below the long-term average of 53.4.

The manufacturing index also dipped sharply to a 3-month low of 43.1 for January from 46.5 previously and has been in contraction for 10 consecutive months.

BNZ Head of Research Stephen Toplis commented; “the softening in the PSI, alongside the weakness in the PMI, is bad news for both near term growth and employment in New Zealand. Tourism has been a key driver of the services sector and will continue to support the economy, but it can’t do all the heavy-lifting by itself”.

He added; “The composite index is consistent with the economy reaching a maximum annual contraction of around 2.0%. We are not nearly that pessimistic but can envisage a trough approaching -1.0% by mid-2024.”

There will be further speculation that the Reserve Bank of New Zealand will shift towards a more dovish stance.

Inflation developments will also inevitably be very important with the latest consumer prices data on Wednesday local time.

Consensus forecasts are for an increase of 0.5% for the fourth quarter after a 1.8% increase previously. The year-on-year rate is expected to decline to 4.7% from 5.6% previously.

A sharper than expected decline would reinforce market expectations of a more dovish Reserve Bank of New Zealand (RBNZ) stance at the February 28th policy meeting.

At this stage, consensus forecasts are for rates to remain at 5.5%.

Stronger-than-expected data would reinforce RBNZ determination to maintain a hawkish stance.

Kiwi Bank expects that consumer prices will increase 0.5% over the quarter with the annual rate declining to 4.6%, the lowest reading since June 2021, and below RBNZ expectations of 5%.

Kiwi Bank added; “Given the data to date, risks to the RBNZ’s forecast appear tilted to the downside. And that’s great news for the RBNZ. Back in November, the RBNZ made very clear their zero tolerance to any upside surprises. Downside surprises they welcome. Upside surprises, not at all.”

According to ANZ; “the main local theme remains the outlook for RBNZ policy, with markets eager to embrace soft data and of a mind to ignore more robust data, all of which is driving interest rates lower as markets brace for more cuts. All of that’s weighing on the Kiwi.”

Nevertheless, ANZ still sees scope for eventual NZD/USD gains; “Data is likely to drive further volatility, but we continue to expect a gradual appreciation over 2024.”

According to ING; “Markets are already pricing in 95-100bp of easing by the end of the year in New Zealand, meaning that NZD is probably more likely to be affected by stronger data and hawkish RBNZ surprises than by a data-miss/dovish surprise combination.”

It added; “Today, the rebound in China’s sentiment can help absorb the impact of softer inflation for NZD.

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