Outlook for NZDUSD following two important events

12:13 PM 8 November 2018

Summary:

  • The latest pop in the NZ dollar has not been fully supported by the interest rate market

  • NZ Treasury says that business confidence “appears to have stabilised”

  • NZIER survey indicates that spending outlays could slow down in the upcoming quarters

  • Without chances for rate hikes in the foreseeable future

  • Yuan’s weakness poses a meaningful downside risk for the NZ dollar

  • Extremely low net long positioning creates a risk for our call

The Antipodean currencies have suffered heavily from the trade dispute between the United States and China. The Australian dollar has lost 7.4% whereas the New Zealand’s dollar has fallen virtually 6% since the beginning of the year. There is no doubt that both currencies have strong links with the China’s economy but the NZ dollar is also burdened with some unfavourable domestic factors unlike the Aussie. Therefore, having to choose between them we would bet against the NZD. However, in this analysis we focus more on the NZDUSD outlining an array of factors suggesting that the latest pop in the NZ dollar is unlikely to be sustained.

Start investing today or test a free demo

Open real account TRY DEMO Download mobile app Download mobile app

The last spike in the NZDUSD does not seem to be justified by changes in the bond market as evidenced by the relationship above. The model is based on the daily data since the start of this year. Source: Bloomberg, XTB Research

In recent days the NZ dollar has seen a major increase which coincided with a possible local top in the US dollar. This outperformance has had something to do with improved risk sentiment globally on the back of remarks coming from Donald Trump regarding a possible trade deal with China. As a result, Chinese equities rallied last week, US bonds suffered while high-yield currencies moved up. The rising yields in the United States offset an increase in NZ yields hence the 10Y yield spread barely changed. As a consequence, our model (it presents a pure relationship between the spot exchange rate and US/NZ 10Y bond yields) points to overvaluation of the NZ dollar. Note that similar overvaluation was seen in March/April when the trade war between the two feuding economies began affecting financial markets. On the one hand, Donald Trump suggested last week that a trade agreement with the Chinese economy could be struck as soon as the end of this month during the G20 summit in Buenos Aires. On the other one, one needs to be aware that any upbeat remarks from the US President could have been a political game. It is possible that Trump wanted to reassure consumers as he seeked to improve his approval rating. Therefore, we think that his last week words, being a sufficient reason to fuel stock markets globally, should be taken with a grain of salt. We touch on the trade war thread later in this analysis.

The investment rate has stabilized recently at a decent level around 5% in annual terms (roughly 4% for private investment). However, the outlook does not look so well looking forward. Source: Macrobond, XTB Research

Analysing the NZ economy itself one needs to mention the latest comments from the New Zealand Treasury. In the Monthly Economic Indicators report it referred to the most recent NZIER quarterly survey showing that business sentiment eased again during the third quarter. According to the Treasury the continued deterioration is “increasing the risk than GDP growth over the year ahead will be softer than the Treasury’s forecast of 3.3% growth in the year to June 2019”. At the same time, it suggested that business confidence could have stabilized but this not seems to be the case looking at the chart above. The Treasury concluded its statement saying that gauging the effects of the above-mentioned deterioration in confidence over the past twelve months or so is a key challenge for the Treasury’s forthcoming semiannual economic and fiscal update (it will be released on December 13). Weak confidence among companies could translate into slower investment expenditure going forward. The relationship between private GFCF (one quarter lagged) and the NZIER indicator reflecting companies’ intentions regarding buildings since 2001 shows nearly 47% correlation providing us with hints that investment spending in the NZ economy will gradually slow down in the next two quarters.

Monetary policy does not send any bullish signals to the NZ dollar as well. In the most recent Monetary Policy Statement (MPS) published on August 1 the Reserve Bank of New Zealand said that “monetary policy remained stimulatory to support employment and ensure further increases in inflation toward 2%”. Compared to the previous MPS dated May 2018 the central bank lowered its path for the main interest rate (OCR), pushed back the time when the output gap (negative) would be closed and slightly adjusted inflation forecasts. It needs to be said that in the long-run higher production is likely to be hampered by a lower rate of net immigration. The fact that the labour market thrived in the third quarter does not seem to be a sufficient reason to affect the RBNZ’s overall rhetoric given that the central bank showed in August that employment would rise. Therefore, we do not think that the newest data from the New Zealand’s labour market could convince the RBNZ to switch its tone toward more hawkish one. Note that the most recent meeting saw inflation rising quicker than previously expected in 2019 but the revision stemmed almost fully from exogenous effects - higher energy prices. Obviously some second round effects cannot be precluded altogether nonetheless we think that the current market pricing is rather demanding (the first rate hike seen in the fourth quarter of 2019) placing the NZ dollar in a weaker position to continue rising on the back of the RBNZ meeting alone. The bank feels quite comfortably with the current stance but it also sees a chance for rate cuts in the future. Taking into account that the NZ economy has strong links with the China’s economy one may anticipate that (the exports’ share in the NZ GDP averaged slightly below 30% since 1990) the faltering economic growth in the world’s second largest economy along with the weakening yuan could reduce external demand in China bearing some consequences to the NZ economy as well. Here is another point we would like to focus on.

The New Zealand dollar has been much more vulnerable to the offshore yuan devaluation compared to the Australian dollar over the recent year. Source: Bloomberg, XTB Research

Analysing the data from the recent year one may arrive at a conclusion that the New Zealand dollar has been more sensitive to the offshore yuan devaluation than the Australian dollar even as the latter relies more on the Chinese demand. When the USDCNH was rising sharply between mid-June and mid-August this year the Australian dollar lost 4.4% against the US dollar whereas the NZ dollar gave back as much as 6.3%. This seems to confirm the conclusions stemming from our analysis. If this relationship holds true in the future one may expect that further falls in the offshore yuan could place the NZD in a worse position compared to the AUD (the trade war is among downside risks to GDP growth according the RBNZ). The key question is whether the trade war between the US and China will end soon. The latest remarks from Donald Trump might have been reassuring but they were made prior to the midterms meaning they might have been politically driven. If the dispute exacerbates, it could see the US dollar higher encouraging the PBoC to allow the USDCNH to move above 7.00. If so, the ongoing bounce seen in Antipodean currencies could constitute a decent opportunity to short them. Having said that, one needs to be aware that the net long positioning in the NZD is currently extremely low posing a downside risk for our recommendation.

The NZDUSD has bounced back sharply and the move has been additionally boosted by the astonishing jobs report for the third quarter. However, sticking to the proverb that one swallow doesn’t make spring we think that the ongoing rally could run into some obstacles relatively soon and is strongly dependent on further developments regarding the trade war. Having this in mind, we recommend going short in the NZDUSD placing a sell limit order at 0.6930 with a stop at 0.7100 and two take profits at 0.6680 and 0.6520 respectively. Source: xStation5

Share:
Back
Xtb logo

Join over 935 000 XTB Group Clients from around the world

The financial instruments we offer, especially CFDs, can be highly risky. Fractional Shares (FS) is an acquired from XTB fiduciary right to fractional parts of stocks and ETFs. FS are not a separate financial instrument. The limited corporate rights are associated with FS.
This page was not created for investors residing in Brazil. This brokerage is not authorized by the Comissão de Valores Mobiliários (CVM) or the Brazilian Central Bank (BCB). The content of this page should not be characterized as an investment offer in Brazil or for investors residing in that country.
Losses can exceed deposits

We use cookies

By clicking “Accept All”, you agree to the storing of cookies on your device to enhance site navigation, analyze site usage, and assist in our marketing efforts.

This group contains cookies that are necessary for our websites to work. They take part in functionalities like language preferences, traffic distribution or keeping user session. They cannot be disabled.

Cookie name
Description
SERVERID
userBranchSymbol cc 2 March 2024
test_cookie cc 25 January 2024
adobe_unique_id cc 1 March 2025
__hssc cc 8 September 2022
SESSID cc 2 March 2024
__cf_bm cc 8 September 2022
intercom-id-iojaybix cc 26 November 2024
intercom-session-iojaybix cc 8 March 2024

We use tools that let us analyze the usage of our page. Such data lets us improve the user experience of our web service.

Cookie name
Description
_gid cc 9 September 2022
_gat_UA-98728395-1 cc 8 September 2022
_gat_UA-121192761-1 cc 8 September 2022
_gcl_au cc 30 May 2024
_ga_CBPL72L2EC cc 1 March 2026
_ga cc 1 March 2026
__hstc cc 7 March 2023
__hssrc

This group of cookies is used to show you ads of topics that you are interested in. It also lets us monitor our marketing activities, it helps to measure the performance of our ads.

Cookie name
Description
MUID cc 26 March 2025
_omappvp cc 11 February 2035
_omappvs cc 1 March 2024
_uetsid cc 2 March 2024
_uetvid cc 26 March 2025
_fbp cc 30 May 2024
fr cc 7 December 2022
_ttp cc 26 March 2025
_tt_enable_cookie cc 26 March 2025
_ttp cc 26 March 2025
hubspotutk cc 7 March 2023

Cookies from this group store your preferences you gave while using the site, so that they will already be here when you visit the page after some time.

Cookie name
Description

This page uses cookies. Cookies are files stored in your browser and are used by most websites to help personalise your web experience. For more information see our Privacy Policy You can manage cookies by clicking "Settings". If you agree to our use of cookies, click "Accept all".

Change region and language
Country of residence
Language