New Zealand dollar likely to remain under pressure against USD for some time

Downside risks of New Zealand’s inflation would be reduced with the help of a weaker New Zealand dollar. But the kiwi has been pretty strong recently and trades above the levels expected by the Reserve Bank of New Zealand on a trade weighted basis. The central bank governor Graeme Wheeler has commented that additional strengthening of NZD might exert pressure on the exporters’ income and squeeze inflation levels of tradable goods long term, thereby exerting pressure on inflation overall.

Therefore, the central bank would attempt to avert the appreciation of NZD through interest rate cuts to not jeopardize the inflation outlook, particularly since a strong exchange rate, that is not matched by an increase in commodity prices, also has the potential to impact growth through declining exports, said Commerzbank in a research report.

Subsequently, the New Zealand central bank hinted in August that it was likely to lower the key rate even further. It is possible that the central bank lower rate by additional 25 basis points by the end of 2016 and also likely to cut rates next year, stated Commerzbank. Accordingly, the New Zealand dollar is expected to remain under pressure against the US dollar, added Commerzbank.

But since the U.S. Fed would be very cautious to take its time and resume its rate hike cycle, the downside potential of the NZD is limited, according to Commerzbank. Rebounding outlook of economic growth and the relatively high interest rate level compared to the other industrialized nations boost demand for the currency, which appears to have been the main driver behind the appreciation of NZD in 2016.