Following the Reserve Bank of New Zealand (RBNZ) meeting, the NZD/USD pair has been consolidating its recent decline. Economists at OCBC Bank provide an in-depth analysis of the pair's outlook.
Key Points
Short-Term Outlook:
- Unwinding of Kiwi Longs: Some unwinding of speculative long positions in the New Zealand dollar may still be underway.
- Persistent High Rates: The RBNZ is expected to maintain a restrictive monetary policy stance for an extended period to achieve its inflation targets.
Medium-Term Outlook:
- Attractive Yield Appeal: NZD remains attractive due to its yield appeal. The RBNZ is anticipated to be among the last central banks in developed markets to cut rates.
- Policy Divergence: A certain degree of policy divergence between the RBNZ and the US Federal Reserve (Fed) is possible in the second half of 2024.
- China's Recovery: The eventual stabilization of the Chinese economy is also likely to support the NZD.
Positive Factors for NZD
| Factor | Impact |
|---|---|
| Yield Appeal | Supports NZD due to high interest rates |
| China's Economic Recovery | Increased demand for NZ exports |
| Policy Divergence with Fed | Potential for NZD appreciation against USD |
Negative Factors for NZD
| Factor | Impact |
|---|---|
| Unwinding of Kiwi Longs | Downward pressure on NZD |
| High Inflation | Limits RBNZ's ability to cut rates |
Summary and Recommendation
Despite the recent decline, the NZD/USD pair possesses inherent strength due to its yield appeal and policy divergence with the Fed. Economists recommend considering the following:
- Monitor Long Liquidation: Track the unwinding of Kiwi longs, which could provide further downside potential in the short term.
- Position for Long-Term Strength: Take advantage of favorable yield differentials and potential policy divergence in the medium to long term.
- Consider Opportunities to Buy Dips: Look for opportunities to buy NZD/USD on dips, especially if supported by positive economic data or developments in China.
Table: NZD/USD Outlook Factors
| Factor | Short-Term | Medium-Term |
|---|---|---|
| Unwinding of Kiwi Longs | Negative | Neutral |
| High Rates | Neutral | Positive |
| Yield Appeal | Neutral | Positive |
| China's Recovery | Neutral | Positive |
| Policy Divergence | Neutral | Positive |
Conclusion
While the NZD/USD pair may experience some downward pressure in the short term due to the unwinding of long positions, its long-term outlook remains positive. The pair's yield appeal, combined with the potential for policy divergence and China's economic recovery, provides a solid foundation for NZD strength.