Tide May Turn for NZ Dollar as Bets on Interest Rate Cuts Pared

(Bloomberg) — The worst may be over for the New Zealand dollar as higher dairy prices and a push-back of interest rate cuts by the nation’s central bank should support the currency.

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The kiwi may recover toward 62 US cents by March-end as traders abandon bets of a May rate cut, according to forecasts. The currency can reach “the mid-60’s” should the Federal Reserve ease policy before the Reserve Bank of New Zealand, Westpac Banking Corp. analysts wrote in a note. The currency closed at 61.13 cents on Friday.

Markets are now pricing an almost 80% chance the RBNZ eases rates in May – less than expectations at the start of January, while economists at ASB Bank Limited and ANZ Bank New Zealand Limited expect the first cut in August at the earliest.

That makes this week’s inflation print “very important” for the kiwi’s direction after a pickup in business sentiment suggests the economy is getting a second wind, said David Croy, a rates strategist at ANZ in Wellington.

“The market has overcooked things to the downside for NZ rates and the NZ dollar, so the kiwi’s probably not far from finding a base,” Croy said. “Sure, cuts are coming, but markets are banking on May and that seems too soon.”

READ: ANZ Bank Now Expects RBNZ Rate Cut in August as Inflation Slows

Relief may also come from rising milk prices, which support the nation’s terms of trade. Global dairy prices have soared since August, leading ASB to lift its forecast for milk solids. It sees dairy, New Zealand’s biggest export, outperforming despite major importer China buying low volumes.

To be sure, the currency still isn’t without risks as the greenback may continue to strengthen as Fed cuts are pushed back. Inflation may also undershoot RBNZ’s forecast, Bloomberg Economics said, while New Zealand’s economy may enter a technical recession in the first half of the year.

That’s led Candriam UK Establishment to short the kiwi with a view that New Zealand could be the first developed nation to start cutting interest rates. “It’s possible the RBNZ could cut in April, as far as I’m concerned,” says Jamie Niven, senior fixed-income fund manager at the €140 billion ($152 billion) investment firm.

The central bank will maintain restrictive rate settings for as long as it takes to push inflation below 3%, said Mark Smith, a senior economist at ASB. Headline inflation is expected to slow to 4.7% from 5.6% in the three months to December, according to a Bloomberg survey, above the midpoint of the RBNZ’s 1%-3% target range.

“It would take a large deflationary shock for the OCR to move lower before the first half of 2024 and we expect a sequence of gradual OCR cuts to begin from the second half of this year – likely August,” Smith wrote in a note. “If, however, progress in lowering inflation stalls, OCR cuts could be delayed until 2025,” he added, referring to the policy rate.

Here are the key Asian economic data this week:

  • Monday, Jan. 22: South Korea trade, China 1-year and 5-year loan prime rates, Hong Kong inflation, Malaysia inflation

  • Tuesday, Jan. 23: South Korea PPI, Australia NAB business confidence, Singapore inflation, Bank of Japan policy decision

  • Wednesday, Jan. 24: South Korea consumer confidence, NZ inflation, Japan trade, Malaysia policy rate

  • Thursday, Jan. 25: South Korea GDP, Hong Kong trade

  • Friday, Jan. 26: Tokyo inflation, Japan PPI, Philippine trade, Singapore industrial production

–With assistance from Naomi Tajitsu.

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