The NZD/USD ‘correction’ is over
The NZD is still overvalued against the Japanese yen (JPY) and euro (EUR), but ongoing quantitative easing from the Bank of Japan and the ECB means this could persist for a while yet.
There is a risk the NZD could go lower in the near term given the RBNZ is likely to cut rates further from here, though if the Bank has learned anything from the last year it is not to go too far, too fast in one direction. The market is already pricing in another 50 bps points of cuts, which if not delivered could see the NZD rally back up.
A big part of the story behind the recent rate cut is dairy prices have continued to weaken when there was previously an expectation of a turnaround. Rising demand from Asia is positive for dairy prices in the long term but a stabilisation in global grain prices would assist a dairy recovery in the shorter term as grains are an input into milk production in the northern hemisphere. Dairy prices have moved lower again recently while global grain prices seem to have bottomed on lower supply estimates. If the rally in grains is sustained, this would be a positive development for dairy prices.
Global grain prices often lead dairy price
Source: Global Dairy Trade, Bloomberg, AMP Capital
Another potential negative for the NZD is the Fed is expected to raise rates this year, which could lead to further USD strength. However, the USD has already rallied hard in anticipation of rate hikes and as a result the greenback is not cheap against the major currencies. The further the USD rises, the less the Fed will have to do on the interest rate front. This is the mirror opposite of the NZD and interest rate outlook. The more the NZD declines, the less the RBNZ will need to cut rates. Thus both the USD and NZD should be self correcting up (and down) to a point.
USD real effective exchange rate
Source: BIS, AMP Capital
Another potential negative for the NZD is the Fed is expected to raise rates this year, which could lead to further USD strength.
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