UBS has expressed caution regarding the New Zealand dollar (NZD), citing a challenging economic outlook and the potential for underperformance against other major currencies.
The pair has traded within a range of 0.59 to 0.62 recently, with relatively high interest rates in New Zealand providing some support despite the weakness of the local economy.
Inflation in New Zealand remains high, influenced by factors such as high unemployment, declining business confidence, and continuing cost-of-living pressures affecting discretionary spending.
However, a slight recovery in dairy prices represents a potential upside for the industry outlook for 2024-2025.
The Reserve Bank of New Zealand (RBNZ) maintained a hawkish stance at its latest meeting, surprising markets by considering raising interest rates. The central bank also adjusted the future path of the official cash rate (OCR), indicating a greater likelihood of further monetary tightening.
However, in a recent interview, Reserve Bank of New Zealand Governor Adrian Orr downplayed the chances of another rate hike as long as inflation expectations remained steady. The near-term consumer price index (CPI) forecast has been revised upward, and the expected return to the 1-3% y/y inflation target range has been postponed until Q4 2024, with 2.9% y/y expected.
The 2024 economic growth forecast was lowered to 0.4% year-on-year from the previous 0.9%, with UBS estimates lower at 0.3%. The forecast for 2025 was also reduced to 1.8% y/y from 2.5% y/y.
The 2024 Budget announcement by the New Zealand government highlighted the challenges ahead, with weak growth forecasts and tax cuts leading to a projected deficit of NZ$13.4 billion in the 2025 financial year, representing 3.1% of GDP, up from a previous forecast of a deficit of NZ$13.4 billion in the 2025 financial year, representing 3.1% of GDP. NZ$6.1 billion. .
UBS expects to issue additional government bonds, which could push yields higher than its current 10-year forecast of 4%. In terms of interest rates, UBS expects a 25 basis point cut in November and a 50 basis point cut in February 2025, with an expected final rate of 3.25% by Q4 2025, down from the current rate of 5.5%.
From an investment perspective, UBS expects the New Zealand dollar to lag most G10 currencies over the next 12 months. They also expect the pair to rise to around 1.15 over the same period, suggesting a long position if the pair drops to around 1.08 or lower.
While technical indicators show the New Zealand dollar is at the upper end of the Relative Strength Index (RSI) range and momentum has been positive, it appears to be waning. Key risks to the NZD/USD outlook include potential hawkish moves by the US Federal Reserve, geopolitical tensions between the US and China, and an unexpected interest rate hike by the Reserve Bank of New Zealand.
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