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Although NZDUSD has been gaining from last two-three weeks, we foresee more bearish rout that is very much on cards during Christmas.
New Zealand terms of trade fell in Q3, before the dairy recovery, given the lags between spot commodity prices and realized prices for NZ exporters. The ANZ’s index of world commodity prices increased 9%q/q, and the index of dairy prices surged 14% in local currency terms, but pass-through to unit prices in the trade data can take from three to six months.
As a result, we project that the terms of trade dropped 3.3%, but will rebound in 2017 as the effect of stronger dairy prices filters through.
Import prices appear to have been neutral for the terms of trade in Q3, but should turn into a headwind if our forecasts of stronger oil prices and weaker NZD are realized.
Next week also brings the ANZ business confidence index for October. We expect confidence to have held relatively steady, caught between the cross-currents of ongoing strength in GDP growth and upgrades to Fonterra’s dairy payout, versus tightening credit conditions due to wider funding spreads and banks’ tighter credit criteria in agricultural lending.
Hence, we target 0.6812 levels in medium-long run (i.e. 23.6% Fibonacci retracements from the highs of 0.7485 levels) which is sensible based on an assumption the Fed will hike in Dec and the further hiking cycle in 2017 is also on the cards, while the RBNZ may hold in short run but would keep door open for further cuts in the months to come.
However the persistent backdrop of global demand for high-yielding currencies is strong - if the Fed either doesn’t hike or signals very gradual tightening, then 0.75+ is likely instead.
The market is still underpricing the likelihood of a Fed hike by year-end. We expect further gradual dollar gains into 2017 as well on account of the FOMC hiking cycle likely to prolong. Overall, the US dollar has had an impressive rise since the US election and has the potential to rise further during the months ahead, not least because the Fed will probably hike in December. Against that, the NZ economy is strong and dairy prices have risen. We are left with a bearish outlook for NZDUSD, targeting 0.70 and below levels.
