A New Zealand Dollar note is seen in this picture illustration June 2, 2017. REUTERS/Thomas White/Illustration/File Photo
WELLINGTON: The New Zealand dollar’s rally may fade in the second half of the year (2H25), as the central bank continues to cut interest rates and the local economy remains sluggish.
With the economic recovery still uneven, strategists see the kiwi’s gain likely topping out at 62 US cents by the end of the year, according to a median forecast compiled by Bloomberg.
Kiwibank anticipates a decline to 60 US cents if the Reserve Bank of New Zealand (RBNZ) reduces borrowing costs.
New Zealand’s economy is showing signs of stabilising and business conditions are improving, but the recovery remains nascent with the nation’s employment still soft.
Even with the RBNZ expected to hold interest rates at 3.25% this week, some analysts see the central bank resuming aggressive easing that would limit the kiwi’s gains.
“Risks to the downside for the kiwi remain, particularly if the RBNZ does end up moving the official cash rate to 2.5%,” said Mieneke Perniskie, a currency trader at Kiwibank in Auckland.
“This drives our view for a potential unwind to 0.6000, following the potential rally.”
The kiwi has strengthened around 9% against the US dollar in the 1H25 due to broad greenback weakness, but has underperformed most currencies among Group-of-10 peers. The currency closed at 60.6 US cents last Friday.
That’s not to say there isn’t scope for a more sustained rally. The US currency could slump on US financial concerns and political pressure for the Federal Reserve to cut rates, according Elias Haddad, a senior strategist at Brown Brothers Harriman, who sees the currency at 64 US cents by December.
However, the kiwi still faces hurdles to get there.
The currency is entering a seasonally soft period, having fallen about 2.1% against the greenback on average in the third quarter of the last 10 years, according to data compiled by Bloomberg.
Further headwinds such as falling milk prices and a dovish central bank determined to prop up an economy that’s fallen in and out of recession may also weigh on the currency.
“I am very non-consensus in forecasting the RBNZ to most likely cut by 25 basis points this week,” said Andrew Ticehurst, a senior rates strategist at Nomura Australia Ltd, who forecasts the kiwi to end the year at 62 US cents.
“Any rate cut would likely come with relatively hawkish communication in our view.
“But even so,” said Ticehurst. “a surprise announcement of a lower cash rate in New Zealand would likely weigh on the currency.” — Bloomberg
