UBS has updated its forecast for the New Zealand dollar (NZD), expecting a weaker-than-expected performance against its G10 peers, including the US dollar.
The adjustment follows a previous warning on May 30 that the pair was on thin ice due to a mismatch between net long positions and growth expectations. UBS then lowered its NZDUSD forecast and suggested a long position on the pair at 1.08, targeting 1.15 over a 12-month horizon.
UBS acknowledged that the Reserve Bank of New Zealand has taken a dovish stance earlier than expected. The bank’s recent visit to New Zealand reinforced its view that economic activity in the country has slowed, with tight monetary policy weighing heavily on domestic demand.
The Reserve Bank of New Zealand’s comments today supported this view, citing business and consumer surveys alongside spending and credit data that point to a decline in activity.
The second-quarter CPI data, due out on July 17, is pivotal. UBS expects CPI to come in below the Reserve Bank of New Zealand’s forecast, with a 0.5% quarterly increase and a 3.4% annual rise, compared with the central bank’s estimates of 0.6% and 3.6% respectively.
It is worth noting that the Reserve Bank of New Zealand has historically not required the CPI to be within the target range to start the monetary policy easing cycle. The RBNZ has now softened its forecast, suggesting a return to the CPI target in the second half of this year, unlike its previous statement in May which indicated the end of 2024.
On cash rates, UBS now expects the Reserve Bank of New Zealand to deliver its first cut of 25 basis points in August, up from its initial forecast in November. The final rate is expected to be 3.25% by the fourth quarter of 2025, down from the current 5.5%.
For investment purposes, UBS sees the New Zealand dollar likely to underperform most G10 currencies over the next 12 months. The bank expects AUD/NZD to rise to around 1.15 over the same period, and suggests adding positions at the current 1.10 level.
Technical indicators for the New Zealand dollar are showing signs of weakness, with the RSI declining and the spot rate falling sharply below its 50-day moving average, while momentum remains neutral. UBS notes that a potential risk to its outlook is an unexpected increase in the second-quarter CPI data.
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