NZD: Mild bias lower - ANZ

Cameron Bagrie, Research Analyst at ANZ, explains that the NZD has been an underperformer and while global forces have been at play, this also reflects the combination of economic data undershooting expectations as pro-cyclical parts of the economy soften, weakness in dairy prices manifests and the RBNZ delivers neutral OCR nuances. 

Key Quotes

“We expect the localised factors to dissipate. The NZD retains solid credentials:  

• The economic pulse remains strong. Weakness in Q4 2016 GDP growth is a blip; annualised growth is set to kick back up towards 4% in Q1 2017. The trend is one of only a modest easing in momentum. 
• A key reason growth is moderating in trend terms reflects capacity constraints; that’s not a sell signal for an economy / currency.
• Commodity (dairy) prices have stabilised. 
• Inflation pressures are building; the RBNZ will not be able to remain a neutral stance for too long. We expect the first rate hike in mid-2018 whereas the RBNZ is saying 2019.
• Fiscal credentials are strong.” 

“There is likely to be some election related unease as 2017 progresses but we are not expecting a major swing towards the anger and resentment vote and change in economic direction.”

“In the absence of a major turn in the global economy (which we are not projecting) the major driver of the NZD over the coming year will be a narrower yield differential.”

“Relative to history though we are pencilling in a shallow currency cycle. This reflects our view that: 1) any lift in rates will be very gradual; 2) historical averages for the yield differential (which point a lot lower) are meaningless when base rates are this low (the gap is a more meaningful percentage difference); and 3) the global economy will navigate a heightened period of uncertainty in an orderly fashion.”

“We continue to favour the AUD/NZD remaining at a sub 1.10 level over the forecast horizon with the business and inflation cycle more advanced in New Zealand.”