New Zealand Dollar Outlook

1-3 Month Outlook 

NZD traded very well in October, rising almost without interruption against USD and against all other G10 currencies, including the other risk proxies. A number of factors underlie NZD's newfound resilience in October, though it is questionable how durable any of them are. Firstly, RBNZ continues to show a clear reluctance to ease policy, both through its decision to keep rates unchanged at the October 28 meeting (opinion was split ahead of the meeting) and through its general commentary. 

Governor Wheeler repeated again this month that further easing would be dependent on incoming data and is not a foregone conclusion. Secondly, the steep decline in NZD since late-2014 has removed much of the overvaluation that has concerned RBNZ for the previous three years. Thirdly, NZ's terms of trade have improved somewhat after the rebound in dairy prices. 

Looking forward, RBNZ's reluctance to ease will fade quickly enough for them to cut at the December meeting (around 50% discounted at present). Inflation continues to undershoot the target with domestic pressures remaining limited at best or, arguably, disinflationary. The RBNZ sees headline inflation returning to "well within the target range by early 2016", but the forecasts have headline inflation only at 1.5% by end-2016. And as the RBNZ itself notes, "concerns remain about the prospects for slower growth in China and East Asia especially." 

Meanwhile, after the October rebound (almost 7% from the September low), the NZD TWI is already creeping back on the policy agenda with RBNZ noting it "...could, if sustained, dampen tradables sector activity and medium term inflation. This would require a lower interest rate path than would otherwise be the case." forecasts continue to incorporate moderate NZD weakness into yearend an early next year.

6-12 Month Outlook

Over the longer horizon NZD/USD is expected to weaken as NZ/US monetary policy diverges. While the RBNZ is particularly sensitive to NZD now, a recovery in export prices (and the terms of trade) would reduce the central bank's sensitivity to the currency. Until then the risks are skewed towards further NZD weakness.