NZD: Elevation but negative bias – ANZ

There are strong pillars of support for the NZD, but a pending turn in the liquidity cycle and less pristine local story leans the research team at ANZ towards a negative bias.

Key Quotes

“The NZD has performed strongly of late. Investors are looking for sound policy direction and stability; anger / resentment vote economies find it hard to deliver that. New Zealand’s terms of trade are at their highest level since the 1970s and it has a trend look to it.  Growth is respectable and volatility is contained.”

“Markets continue to question the prospects of the Fed (and others) lifting interest rates. There is good carry in association with solid fundamentals.  Valuations are supportive. However, we favour fading NZD/USD strength at around the 0.73 level reached in mid-June.”

“We expect the liquidity cycle to turn late in 2017. The case for further interest rate normalisation is weakening given core inflation measures continue to undershoot and a major driver of headline inflation (oil) has fallen 20%, creating a deflationary pulse.  However, we expect attention will increasingly focus on central banks (notably the Fed in the first instance) reducing balance sheets as the mechanism to cool financial stability risks.”

“That means a turn in the credit pulse. New Zealand’s soft commodity basket has bucked wider commodity trends.  It would be unusual for resistance to continue.”

“We remain cautious towards prospects for global growth in a world beset by policy uncertainty as the resentment vote reshapes economic direction. When policy uncertainty is high, the time-value option for firms is in waiting to put cash to work.  Accordingly, growth tends to undershoot. But any turn in the NZD is expected to be modest given the already mentioned supports.”