The NZ dollar is not likely to be subjected to an interest rate cut suggest BNZ - contrary to what many in the currency markets are now thinking. How does this impact on the NZD forecast profile?

The New Zealand dollar (NZD) has come under sustained selling pressure in May as markets start to price in the prospect of a Reserve Bank of New Zealand (RBNZ) interest rate cut. As we reported a few days ago, this observation has certainly spooked traders worried that the country will lose its ‘carry trade’ advantage.

Talk of an interest rate cut in 2015 has started to become more common, and the reaction of currency markets would suggest some traders are simply not willing to be exposed to the NZD as long as this chatter continues. We know the RBNZ is eager to push the value of the currency lower, and a bout of weak economic data could offer them the opportunity to do so.

The pound to New Zealand dollar exchange rate conversion (GBP-NZD) has risen from the long-term support line at 1.94 in April to 2.0985 at the present time on the back of these fears.

The euro to NZ dollar exchange rate conversion has meanwhile risen from multi-year lows at 1.3882 to recover to 1.5148. The Australian dollar has been allowed to recover from near on parity with the NZD towards 1.0829.

Beware. All quotes in this piece reference the inter-bank spot rate. Your bank transfer will affix a spread at discretion. Independent providers are however able to get you closer to the spot market rate, in some cases this can deliver up to 5% more currency. Find out more.

BNZ See No Rate Cut

BNZ have today told clients that they do not share the view adopted by many in market but acknowledge the RBNZ formally shifting from a resolutely neutral bias on monetary policy, to what they describe as a 'conditional easing' bias.

“It would be appropriate to lower the OCR if demand weakens, and wage and price-setting outcomes settle at levels lower than is consistent with the inflation target,” the RBNZ said in their April statement.

For BNZ, it is the word “settle” that is particularly important.

“It implies that a period of assessment is necessary, to ascertain whether or not prices and wages will continue to trend lower. We are not yet convinced this will happen, nor do we think the RBNZ can yet be satisfied this is the case. Hence, we continue to see the RBNZ on prolonged hold, rather than envisaging rate cuts in 2015,” say BNZ.

BNZ’s New Zealand Dollar Forecasts for 2015, 2016 and 2017

Importantly though, no rate cut does not equate to NZ dollar strength. “We see poor risk-reward in fighting the bearishness on NZD generated by RBNZ rate cut speculation. After all, we have been (and remain) medium-term bears.”

As such the BNZ are comfortable with the current level of NZD-USD, seeing the 0.74 level holding until June. From there the currency pair is to fall, in line with the interest rate rising cycle in the United States.

Further forecasts are seen in the below table: