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For what concerns the exchange rate, the RBNZ has reasserted that a depreciation would be appropriate, given the weakness of export prices (Fig. 2). After depreciating significantly between August and September, the New Zealand dollar turned back up (Fig. 5). In the past month, it has risen from EUR/NZD 0.63 to 0.68 against the US dollar, and from EUR/NZD 1.72 to 1.61 against the euro.

Therefore, we confirm our expectations for a weakening of the New Zealand dollar in the near term, towards NZD/USD 0.62-0.60 on a 1m-3m horizon. This is the time horizon on which the RBNZ may implement another interest rate cut, in full divergence compared to the Fed, which, by contrast, should resume hiking rates between 2Q and 3Q.

In the longer run, we stick to our gradual recovery scenario, mostly on the back of the excellent pace of growth expected in the next two years (Fig. B). Alongside the downside revision of inflation, the central bank has revised upwards its growth projections, from 2.4% to 3.3% in 2016 and from 3.0% to 3.2% in 2017. By contrast, the 2018 forecast has been revised downwards, from 3.4% to 3.1%, although the growth remains very high, at over 3.0%.

The New Zealand dollar should weaken against the euro as well in the near term, rising back at a later stage. The recovery against the euro, however, should prove more modest, on expectations for the EUR/USD exchange rate to also rise back beyond the short term. Upside risks generally prevail, i.e. the New Zealand dollar could prove stronger than expected on a 12m-24m horizon. The RBNZ will resume increasing rates well ahead of the ECB. However, even before the new hike begins, differentials will remain extremely wide: the official RBNZ rate is 2.25%, while the ECB has just cut its policy rate (yesterday) from 0.05% to 0.00%.

New Zealand Dollar, NZD, New, All-Time, Low, Currency Analysis, Reserve Bank ,  fx trader, forex,  fig1New Zealand Dollar, NZD, New, All-Time, Low, Currency Analysis, Reserve Bank ,  fx trader, forex, fig2

New Zealand Dollar, NZD, New, All-Time, Low, Currency Analysis, Reserve Bank ,  fx trader, forex, fig3New Zealand Dollar, NZD, New, All-Time, Low, Currency Analysis, Reserve Bank ,  fx trader, forex, fig4

New Zealand Dollar, NZD, New, All-Time, Low, Currency Analysis, Reserve Bank ,  fx trader, forex, fig5New Zealand Dollar, NZD, New, All-Time, Low, Currency Analysis, Reserve Bank ,  fx trader, forex, fig6Source: Thomson Reuters-Datastream

 

Luca Mezzomo / Chief Economist
Asmara Jamaleh / Economist – Forex Markets
Intesa Sanpaolo Research Department

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