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FX CURRENCY WATCH


source of domestic uncertainty: the RBNZ has worked on an estimate of the effects of the measures announced by the new government, and has concluded that, for now, “the impact of these policies remains very uncertain”) the central bank has reasserted that monetary policy will remain accommodative for a considerable period of time, and confirmed that it expects to hike rates for the first time only in 2019, while bringing forward the timing from 3Q to 2Q. In our view, if inflation sets out sure-footedly on a convergence path towards target, and if growth is approximately in line with the strengthening trend expected by the RBNZ, the initial rate hike could come earlier than currently indicated by the central bank, which has probably opted to maintain a cautious approach to the start of the monetary policy normalisation process, also to prevent a new, unwelcome appreciation of the exchange rate, which is more reactive to the raising of policy rates, which – despite being at historically low levels – are in any higher than in all the other advanced economies, at 1.75%.


Terefore, we confirm our expectations for an appreciation of the New Zealand dollar on a one-year horizon, with a recovery towards NZD/USD 0.74-0.75 in view of a resumption of the RBNZ’s rate hike cycle. In the near term, on the other hand, the exchange rate could weaken back, with downside extending to recent lows in the NZD/USD 0.67 area, due to political uncertainty at the domestic level and to the widening of rate/yield differentials as the Fed presses on with its rate hike, while the RBNZ maintains its neutral bias, especially in the opening months of 2018, when inflation is expected to drop further. In much the same way, against the euro – aſter depreciating sharply this year, from a high of 1.45 to a low of 1.74 EUR/NZD on the prevailing appreciation of the EUR/USD – the New Zealand dollar should weaken temporarily in the near term, only to strengthen back subsequently, heading for EUR/NZD 1.65 on a one-year horizon, in view of the start of the RBNZ’s cycle of interest rate hikes. Tis will be a modest strengthening due to the simultaneous expected appreciation of the EUR/USD. Risks have shiſted slightly to the downside, i.e. the New Zealand dollar could prove weaker than expected in light of the uncertainties generated by the changes in the domestic political context.


28 FX TRADER MAGAZINE January - March 2018


Fig. 2 – Exchange rate and commodities


Fig. 4 – NZD: speculative investor positions (CME)


Fig. 6 – Real effective exchange rate (BIS) Luca Mezzomo/Chief Economist


Asmara Jamaleh /Economist – Forex Markets Intesa Sanpaolo


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