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22/6/2018 — Gold
Caution about the Kiwi dollar
By Dene Mackenzie

Strategists are becoming more cautious about the path of the New Zealand currency as the United States economy starts to strengthen and the Federal Reserve appears likely to lift interest rates this year.

The $US recovery started in mid-April. A stronger $US acts like a tightening in global financial conditions and this is having a negative impact on emerging markets.

BNZ senior market strategist Jason Wong said there had been some spillover into commodity currencies like the Australian and New Zealand dollars. In China, a weaker credit environment and signs of weaker growth were also evident, hindering the outlook for commodity prices and currencies should those trends persist.

Stronger NZ commodity prices, and still-high levels of risk appetite, had supported a US71 cents to US72¢ range for the BNZ's short-term fair value model estimate for much of the year, he said.

Any support factors for the $NZ could easily give way should the global growth outlook deteriorate.

“US-China trade tensions have escalated recently following the imposition of import tariffs by the US and immediate retaliatory action from China.”

The direct impact of the trade war on growth and inflation was negligible at this stage. A further escalation of tensions would be a negative factor for the kiwi.

Wong said the The US68¢ to US69¢ support area in place for the past 18 months looked vulnerable in the short-term. As a result of the global factors, BNZ had shaved US2¢ off its September target to the mid-point of $US68.5¢ but left the year-end target at US70¢ unchanged at this stage.

Reserve Bank monetary policy remained unsupportive for the kiwi as core inflation remained below target. Easier fiscal policy and higher farm incomes supported economic growth in the coming year.

“Despite our near-term downgrade to the dollar, at a current bottom-of-the-range level, it would be prudent for exporters to add to cover for those who are under hedged.

“Given our near-term outlook, for importers it looks a real stretch to see a quick return to levels seen earlier this year of above US72¢.”'

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