Fx flash nzd outlook improving 2 november 2016

FX Flash

Group Economics Macro & Financial Markets Research

02 November 2016

NZD outlook improving Roy Teo Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com

 Unemployment rate in 2016 Q3 declines to lowest level since 2008 Q4  Milk powder surged 20% - positive for the NZD  Final OCR cut in November 2016  NZD forecasts under review

Unemployment rate in 2016 Q3 declines to lowest level since 2008 Q4 The New Zealand dollar (NZD) rose from 0.7185 to above 0.72 early this morning after data from Statistics New Zealand showed that the unemployment rate declined to 4.9% in the third quarter of this year. This is the lowest level since the last quarter of 2008. The participation rate also rose to 70.1%, a record high. In addition, annual wage growth edged higher from 1.5% to 1.6%.

Milk powder prices surged 20% - positive for the NZD In the latest Global Dairy Trade auction, milk powder prices surged by 20%. This is positive for the dairy sector in New Zealand and likely to reduce the Reserve Bank of New Zealand (RBNZ) discomfort with the strong NZD. The latter is more than 2% stronger than the RBNZ’s 2016 year-end forecast.

Final OCR cut in November 2016 Given that inflation in the third quarter slowed from 0.4% to 0.2% yoy, we still expect the RBNZ to lower the Official Cash Rate (OCR) by 25bp to 1.75% on 10 November. This is about 80% priced in by financial markets. However as inflation is projected to recover to 1% in the last quarter of this year and towards 1.6% by the end of 2017, it is likely that the RBNZ will maintain the OCR at 1.75% next year. Data from the RBNZ also show that inflation expectations have started to recover modestly after hitting a trough in the first quarter of this year.

NZD forecasts under review We see a material risk that the NZD will be stronger than our 2016 year end forecast of 0.70 against the US dollar. We are reviewing our NZD forecasts for 2017, with an upside bias. We favor the NZD relative to the Australian dollar (AUD) as the New Zealand economy is faring better. The AUD is also vulnerable to a slowdown in property investment growth in China. Finally, speculative net long positioning in the AUD is also more overcrowded that the NZD. Our assessment is that the AUD outperformance against

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FX Flash - NZD outlook improving - 02 November 2016

the NZD to slightly below 1.08 last month is over. We expect the AUD to underperform the NZD towards 1.0470 later this year.

Inflation expectations have troughed

Speculative net positions in AUD and NZD

%

Number of contracts

4.0

Number of contracts

100000

3.5

30000 20000

50000

10000

3.0

0 0

2.5

-50000

-10000

2.0 1.5 Jan-10

-100000 Jan-10 Jul-11

Jan-13

2y inflation expectations %

Jul-14

Jan-16

Jan-13

Jul-14

Jan-16

Non-commercial net AUD futures positions (lhs)

NZ OCR %

Source: RBNZ

-20000 Jul-11

Non-commercial net NZD futures positions (rhs) Source: CFTC

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FX Flash - NZD outlook improving - 02 November 2016