Balance of risk to the upside for the NZD – BNZ

Jason Wong, Currency Strategist at BNZ, suggests that the upside risk to their NZD forecasts prevail if the Fed keeps policy on hold.

Key Quotes

“No Fed tightening in December could see the NZD higher from its current level, not lower. And if the Fed is on hold through 2017, then we’d expect to see further gains in the NZD, first stop 0.75 and then potentially into the high 70s.

While our assumed Fed tightening represents the key downside risk to the NZD, there are other potential downside sources. Global risk appetite over recent months has been fuelled by the lower-for-longer global rates environment. But some exogenous factor – a political shock in the US or Europe, a large corporate default, an oil shock, for example – could provide a blow to risk appetite at some point and put downward pressure on the NZD.

China has been out of the spotlight recently, but the risks of a financial stability event in that country haven’t gone away. This is a slow-burner risk that would ultimately end up negative for the NZD.

That said, there are also upside risks to the NZD. The NZ economy is travelling well amidst a broadly-based economic expansion. There’s nothing on the horizon to suggest that growth is about to falter.

Furthermore, with dairy prices reviving from depressed levels amidst an improving supply/demand dynamic, there is upward potential for NZ commodity prices from here. Higher NZ commodity prices would be NZD-supportive. Much higher dairy prices would inject some much-needed optimism into the agriculture sector and significantly reduce one of the few negative growth impulses in the economy.”