© Chris Tennent-Brown
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An easing bias remains, but it is not as explicit as in July when the RBNZ's outlook changed significantly. The RBNZ's 90-day bank bill forecast track is consistent with a further 25 basis points cut over the year ahead. We continue to expect the RBNZ to cut rates in October to a low of 2.5%, and for the RBNZ to be comfortable once the OCR reaches that level. For one, we see the risk that Q2 GDP is softer at 0.4% than the RBNZ's 0.6% quarter-on-quarter forecast.
Next year we see the prospects slightly biased to further cuts, with the risk that inflation does not return to 2% as quickly as the RBNZ anticipates. In the near term, we expect growth in the last half of 2015 to slightly undershoot the forecast. More broadly, we expect growth to be slightly softer over the next year relative to the RBNZ.
The Kiwi is on its way to its lowest close since 2009, whilst the drop was prompted by broader commodity worries and the US Dollar gains. What other events could determine the behaviour of the NZD by the end of 2015?
We have cut our forecasts for the New Zealand Dollar for four reasons. First of all, we expect the US Dollar to re-strengthen modestly, as the Federal Reserve tightens monetary policy. The underlying strength of the US labour market provides the Fed with more confidence to begin raising interest rates by year-end, and continue steadily lifting interest rates in 2016.
Another factor is lower China GDP growth forecast. China is New Zealand's second largest export destination, behind Australia, and the main destination for domestic dairy. The price of New Zealand's dairy exports has more than halved since 2014. That cut in the export income is a major headwind to income growth and reduces New Zealand's Terms of Trade, which happens to be the dominant driver of the Kiwi in the medium term.
Furthermore, the slower predicted growth in Chinese GDP also has knock-on effects to New Zealand through Australia due to exports. However, we note the Chinese slowdown is concentrated in hard-commodity intensive investment rather than consumer spending.
And finally, expectations that the Reserve Bank of New Zealand will cut the Official Cash Rate to 2.50% this year could be an additional factor which will determine the performance of the Kiwi. Given New Zealand's low wage and CPI outlook, in our view, there is a risk of further RBNZ rate cuts in 2016 that will undermine the NZD significantly.
What are your forecasts for NZD/USD and AUD/NZD in the short and long term?
Our current forecast for the NZD/USD currency pair stands at 0.60 in the Q4 of 2015 and at 0.61 by the end of the next year respectively, while the AUD/NZD we see at 1.10 in the fourth quarter of 2015 and at 1.14 by the end of 2016.