BNZ sees a downside risk for the kiwi that is already trading below the fair value estimate

The overall risks associated with domestic forces are weighing on the New Zealand dollar, and Bank of New Zealand says its fair value estimate of 70 cents is facing downside risks that could push it further down.

"The biggest short-term risk we see for the NZD is the constant pressure on emerging market asset prices," which coincided with a recovery in the US dollar, according to strategist Jason Wong.

He said that domestic forces are also negative for the kiwi dollar and New Zealand 's monetary policy continues to act as a drag on the currency, noting that the market is now pricing a small chance of "the dollar". a rate cut over the next six months. Although "we do not think the bank will lower rates, short-term risks slightly favor a lower rate rather than a rise over that period, adding to bearish pressure on NZD," he said. said. He adds that growth in gross domestic product is barely positive per capita and that business confidence continues to weaken, as current earnings expectations suggest considerable risks to our growth forecasts. . "

Wong said that the risk appetite index of the BNZ has fallen to 56%, which is at the bottom of the 18-month range, that commodity prices New Zealand fell the US one-year swap rate fell near zero.

"We see the outlook for all models down," he said. more uncertain with the intensification of trade wars, "the risk appetite probably deserves to be lower." New Zealand agricultural prices have significantly outperformed world prices and the latter should ultimately impose a bearish bias, as New Zealand's prices return in line with international prices.Finally, the rise in short-term interest rates in the United States will become more attractive compared to the static rates of New Zealand.

Assuming a fall from e 10% of commodity prices in New Zealand, the risk appetite index of the BNZ drops to just under 46% and the NZ-US rate gap drops to 50 base points. The American cents, 70 cents, he said.

The kiwi traded at 67.63 US cents at 13:40 in Wellington. The International Monetary Fund (IMF) estimated this week that New Zealand's real effective exchange rate remains above its long-term average despite a recent depreciation and that the New Zealand dollar is moderately overvalued.

However, there are also good reasons not to become "too bearish". Even though commodity prices may fall, New Zealand's terms of trade are likely to remain close to record highs and recent weak data should be temporary as fiscal stimulus supports the pace of growth. growth in the second half. Inflation will begin to emerge and "higher data on inflation could easily change perceptions about the next move of the RBNZ, ultimately helping to support the NZD," he said.

(BusinessDesk)

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