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The NZD/USD ‘correction’ is over

21 July 2015
interest, NZD, rates, RBNZ, USD
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.
This blog post has been prepared to provide general information and does not constitute 'financial advice' for the purposes of the Financial Advisors Act 2008 (Act). An individual investor should, before making any investment decisions, consider the information available in the relevant Product Disclosure Statement and seek professional advice. While every care has been taken in the preparation of this document, AMP Capital Investors (New Zealand) Limited and the AMP Group (together, 'AMP') make no guarantee that the information supplied is accurate, complete or timely and do not make any warranties or representations in respect of results gained from its use. The information is not intended to infer that current or past returns are indicative of future returns. The views expressed are those of the author and do not necessarily reflect those of AMP. These views are subject to change depending on market conditions and other factors.

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