Why the New Zealand dollar still has further to fall - DailyFX Tips & Picks

The Reserve Bank of New Zealand did indeed cut rates at last week’s meeting, catching the markets off guard. The Official Cash Rate was reduced by 25 basis points to 3.25 per cent. New Zealand dollar-dollar followed suit and declined to $0.6940 from $0.7230, before price started to digest its losses.

We expect New Zealand dollar-dollar to head even lower in the coming months. Our near-term target is $0.66 as long as we trade below last week’s high at $0.7230. Looking six months ahead, it would not surprise us if we reach $0.66.

The reason for this gloomy outlook is the Reserve Bank’s updated estimates of New Zealand’s GDP output gap. These proved to be lower than we previously estimated, which warrants at least one more cut in the Official Cash Rate. The Reserve Bank itself projects moderate growth in the future and doesn’t rule out another cut.

As a consequence of the rate cut, very low core and headline inflation, and worsening labour market conditions, the New Zealand two-year swap rate has plummeted. And we don’t expect investors to try to fade this decline in rates given its strong momentum and lack of a good fundamental story. With this in mind, New Zealand swap rates should head even lower in the coming weeks, suppressing the Kiwi dollar.

In the meantime, on the other side of the Pacific, US non-farm payrolls, US core retail sales, and ISM manufacturing all beat expectations, triggering much higher two-year swap rates in the US. This divergence in macro fundamentals should keep traders busy shorting the New Zealand dollar.

Alejandro Zambrano is a currency strategy analyst at DailyFX. @AlexFX00

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