NZD: Still on track to cheapen further - SocGen

Alvin T. Tan, Research Analyst at Societe Generale, notes that there are several fundamental cross-currents affecting the NZ dollar.

Key Quotes

“Domestic economic growth is holding up well, the housing market continues to be buoyant and interest rates are relatively high among G10 currencies. On the other hand, milk prices have been weak, inflation has surprised to the downside and the currency remains overvalued.

New Zealand's exports of primarily soft commodities are less tied to the global industrial cycle, which renders the country relatively less exposed to the Chinese structural growth slowdown than other commodity exporters. Nonetheless, low milk auction prices are causing a cash crunch in the important and highly leveraged dairy sector.

The RBNZ clearly prefers a weaker currency, and the lack of inflation has allowed it to ease policy in recent quarters, and a further cut in H2 16 is expected. But the RBNZ has the distinction of possessing the highest policy rate among G10 central banks, even with another 25bp cut. Without aggressive easing on the part of the RBNZ, a weaker NZD depends on a combination of Fed tightening and more unsettled global market conditions. We expect both of these to occur in the second half of the year. The NZD also tends to suffer in times of elevated volatility in global markets, and this too should be the case going forward.

Finally, the long-term mean reversion of the kiwi dollar's overvaluation is ongoing and should continue to play out over the coming year.”