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NZD/USD: A better year ahead for the Kiwi – BNZ

After the 5% fall in the NZD last year, the BNZ Currency Research Team, think the odds favour a better year in 2019. They point out that a weaker global growth backdrop would normally be a headwind for the NZD, but the market became overly pessimistic late last year on the outlook.

Key Quotes: 

“Our short-term fair value model suggests that the NZD is only marginally rich, with fair value around 0.66-0.67, certainly nowhere near statistically significant. We think that the market already prices in some of the good news around a possible US-China trade deal – the NZD spent several months last year in “under-valued” territory when concern about the trade war was at its greatest and there was no deal in sight. The lack of any deal over coming months would be a blow to risk appetite and the NZD.”

“A weaker global growth backdrop would normally be a headwind for the NZD, but we wouldn’t overplay this at present, given some chance that the market became overly pessimistic late last year on the outlook. Risk appetite has fallen steeply from year-ago levels to belowaverage suggesting less concern that a bout of weaker risk sentiment will drive the NZD lower.”

“After the 5% fall in the NZD last year, we think the odds favour a better year in 2019. As per our last forecast update in early December, our year-end target remains at 0.70. There might well be times when the NZD trades above that level. The best chance for a sustained move higher would be some focus on the “over-valued” USD and structural headwinds in the face of a rising twin deficit.”

“The key downside risk for the NZD would be a potential US-China trade deal turning to custard, or a renewed bout of weaker global risk appetite on fears that the growth environment is taking a turn for the worst, with the US economy on a path towards recession. However, if the Fed doesn’t hike rates again we find that scenario unlikely.”

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