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How would you evaluate the current performance of the NZD/USD?
I think the market is long on the currency pair due to a couple of reasons. The main issue is obviously the weakness of the greenback, given QE3 and the fact that the ECB has officially decided to launch the OMT programme, which will help Spanish and Italian bonds. Thus, there is a risk-on sentiment in the market. That is one thing, which keeps the U.S. dollar on the back foot and long New Zealand dollar positions. The other aspect is that there is no need for interest rates cuts, which means that kiwi is going to stay strong, compared to the aussie, as the market is pricing in the RBA interest rate cuts.
Thus, the so-called kiwi will remain at least on the front foot for now. In terms of positioning, I think the market is too long, the New Zealand dollar traded at 81.44 versus the U.S. dollar. It is a good chance that by the year end we see the kiwi pushing up to maybe even 83-84 level. In my opinion, any downside risks of the New Zealand dollar are coming from Australia, because the kiwi is a close proxy for the aussie dollar. As Australia heavily depends on China's imports of iron and copper from Australia, the slowdown in China is obviously impacting the aussie and kiwi. Moreover, the market is waiting for another interest rate cut by the year end. That is the only downside risk of the kiwi. There might be seen a pullback for the New Zealand dollar if it is closer to the 80 level, before we see another rally of the kiwi by the year end. We expect that global growth will gain momentum, with China's economy coming back on track.
The Reserve Bank of New Zealand has kept the official cash rate at a record low of 2.5 per cent since March 2011 and last month signaled no change in borrowing costs until late 2013. However, there is a speculation that the country's central bank may cut interest rates due to inflation slowdown. Do you think the Reserve Bank will decrease interest rates in the near future? What effect it may have on the NZ Dollar?
If the kiwi dips lower than expected and inflation is below the target level, there is a need for the central bank to cut the interest rates.
However, after the earthquake in the beginning of the year New Zealand's economy is performing better than the market had expected. This fact has been keeping the New Zealand dollar strong and we do not see the RBNZ having a bias towards cutting the interest rates just yet. Therefore, we do not see the kiwi weakening like the Australian dollar for the last one-two months, when there was a domestic slowdown and employment numbers were bad.
What are your forecasts for the NZD/USD and NZD/JPY pairs till the end of the year?
Our NZD/USD year- end target is 83. We expect USD/JPY to trade at 73, thus our NZD/JPY forecast is 67.