© Thu Lan Nguyen
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We would agree with most analysts that the RBNZ will indeed cut its key rate again. One trigger would be a further strengthening of the NZD against the USD, as this would go against its latest projections, which foresee a depreciation of the NZD on a trade weighted basis by roughly 4% by the end of this year still. Undoubtedly, the RBNZ is banking on this depreciation in order for it to reach its inflation target. Thus, if the NZD were to appreciate in the next couple of weeks, there is a great chance that the RBNZ will indeed cut its key rate at its December meeting. However, our base case is that the RBNZ waits until Q1 2016 as this way, it can wait for the US Fed to do it a favour and raise rates in December, which would strengthen the USD against the NZD.
New Zealand's trade deficit widened unexpectedly last month and hit a 12-month high as dairy exports declined and imports remained stronger than anticipated. According to ASB economists, weak dairy production and export volumes highlight the direct drag the sector will have on the New Zealand economy. Do you think a recovery is to be expected in the foreseeable future?
A recovery much depends on how fast the New Zealand economy is able to diversify away from the commodities sector and in this respect, a weak NZD too is crucial because it will give an initial boost to the export sectors outside the dairy sector. We do expect the export sector to recover next year. A main risk however is a more significant slowdown of the Chinese economy, a main trading partner, than currently assumed.
What will be the major headwinds for the Kiwi until the year end and what are your forecasts for NZD/USD and AUD/NZD for the shorter and longer term period?
The main driver of the exchange rate will be US monetary policy speculation. As the market increasingly prices in a potential rate hike by the Fed at its December meeting, NZD/USD should trend downward due to a stronger USD. We expect NZD/USD to drop towards 0.63 by year end. In a similar vein, we expect AUD/USD to drop towards 0.70. The AUD will outperform the NZD somewhat as the RBNZ has made much clearer that it wants a weaker currency and thus would be willing to cut its key rate further.