2024 March, 3, 07:29:27 AM

NZD/USD Outlook: Kiwi Longs Unwind, But Yield Appeal Remains

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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.

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