Investors have been watching the Australian dollar weaken since January, but they may not be aware that the currency of our near neighbour New Zealand has also been under pressure, with further weakening likely.
The New Zealand dollar has fallen as the Fed continues to raise rates in the US and the Reserve Bank of New Zealand (RBNZ) announced an unexpectedly dovish policy stance.
In its August monetary statement, the RBNZ kept its official interest rate on hold at 1.75%. The RBNZ said that while it expects to keep the official cash rate at 1.75% through 2019 and into 2020 – longer than it projected in its May statement – the direction of its next rate move “could be up or down”.
Investors had been expecting interest rates to rise, albeit gradually, and were caught off guard by the statement, triggering a sell-off in the NZ dollar.
Investors have linked the dovish comments to worsening business confidence. The ANZ Business Outlook Index slumped in August to its lowest level since April 2008 when New Zealand was in recession. The RBNZ also downgraded forecast GDP growth in 2019 from 3.1% to 2.6%, although recently released June quarter GDP growth was stronger than expected.
Subsequently, some investors are now concerned the RBNZ’s next move might be a rate cut.
On the one hand, New Zealand’s terms of trade (the ratio of export prices to import prices) is reasonably supportive of the NZ dollar. But on the other hand, there is this talk the RBNZ may cut interest rates.
Our view is the RBNZ is on hold; but there is downside risk of a rate cut, as there is in Australia with our Reserve Bank, so we wouldn’t be surprised if we saw a bit more downside in the value of the NZ dollar against the US dollar.
What does that mean for the performance of the NZ dollar against the Australian dollar?
We believe Australia’s exchange rate with the New Zealand dollar (AUD/NZD) will go sideways. Both countries face similar risks. And both central banks have a bias towards holding interest rates steady.
In the US, however, the Fed is raising rates which makes it a much more attractive place to park money than in Australia or New Zealand.
This means that we may see further weakening of both New Zealand's and Australia’s currencies against the US dollar.
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