NZD: still the least favoured Antipodean in 2016

2015 delivered what most believed had been long overdue for the New Zealand dollar; a 17% decline year-to-date and the worst performance against the USD within the G10. The combination of 75bp of easing from the RBNZ and a sharp decline in dairy prices cemented the Kiwi's underperformance. Within the commodity bloc, the NZD's underperformance was only outdone by BRL and MYR; hardly something to boast about, given that both these currencies suffered from crippling idiosyncratic dynamics in the past year. Relative to 2015, the NZD has made both lower lows and a lower high, an outcome which has not been seen since 2009. 

"We maintain a bearish outlook for the NZD over the next year, which, relative to our AUD forecasts, anoints the NZ dollar as our least favoured Antipodean currency in 2016. We are forecasting the NZD at by Jun-16 and by Dec-16", says J.P. Morgan.

There are two key reasons for the (relatively) less positive view on NZD; first, the fact that the RBNZ will continue its easing cycle through to 1Q16; a further 50bp of easing is expected from the RBNZ (in contrast, the market has just 25bp of easing priced). This, against a backdrop of rising US short rates, should see short real rates compress further and keep the pressure on NZD. 

Second, the current account deficit is expected to exhibit a material deterioration in 2016, which, against a backdrop of rising US yields, should argue for more risk premium to be priced into the New Zealand dollar. In the spirit of assessing what is new for the NZD in 2016 relative to 2016, the current account dynamic deserves attention.