UBS expressed caution on the New Zealand dollar (NZD), citing a challenging economic outlook and the possibility of underperformance against other major currencies.

The pair has recently traded between 0.59 and 0.62, with relatively high interest rates in New Zealand providing some support despite the weakening domestic economy.

Inflation remains high in New Zealand, driven by factors including rising unemployment, failing business confidence and persistent cost of living pressures that are weighing on discretionary spending.

However, a slight recovery in dairy prices represents a potential improvement in the industry’s forecasts for 2024-2025.

The Reserve Bank of New Zealand (RBNZ) maintained a hawkish stance at its last meeting, surprising markets by considering an interest rate boost. The central bank also adjusted the forward rate of the official cash rate (OCR), indicating a greater likelihood of further tightening of monetary policy.

Nevertheless, RBNZ Governor Adrian Orr in a recent interview downplayed the chances of another interest rate hike as long as inflation expectations remain unchanged. Short-term forecasts for the Consumer Price Index (CPI) have been revised upwards, and the projected return to the target inflation range of 1-3% y/y has been postponed to the fourth quarter of 2024, with a projection of 2.9% y/y . -per year.

Economic growth projections for 2024 were lowered to 0.4% year-on-year from the previous 0.9%, with an even lower UBS estimate of 0.3%. The 2025 forecast was also lowered to 1.8% year-on-year from 2.5% year-on-year.

The New Zealand government’s 2024 budget announcement highlighted future challenges, with weaker growth expectations and tax cuts leading to a projected deficit of NZD 13.4 billion in financial year 2025, representing 3.1% of GDP, compared to earlier a forecast deficit of NZD 6.1 billion.

UBS anticipates additional government bond issuance, which could push yields higher than the current 10-year forecast of 4%. On interest rates, UBS expects a cut of 25 basis points in November and 50 basis points in February 2025, with a projected final interest rate of 3.25% by the fourth quarter of 2025, down from 5 now. 5%.

From an investment perspective, UBS expects the New Zealand dollar to lag most G10 currencies over the next 12 months. They also anticipate the pair rising to around 1.15 over the same period, suggesting a long position if the pair falls to around 1.08 or lower.

While technical indicators indicate that NZD is at the upper end of its Relative Strength Index (RSI) range and momentum is positive, it appears to be failing. The key threats to the prospects of the NZD/USD pair include potential hawkish moves by the US Federal Reserve, geopolitical tensions between the US and China, and an unexpected interest rate boost by the RBNZ.

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