New Zealand Dollar 2009 Forecast

 

How Did the New Zealand Dollar Trade in 2008?

In 2008, the New Zealand dollar lost value against every single major currency except for the British pound.  Although the most pronounced weakness for the currency was against the Japanese Yen, the kiwi also fell to a 5 year low against the US dollar and a 7 year low against the Australian dollar. The collapse of the carry trade weighed heavily on all of the major currencies but the New Zealand dollar was one of the first to peak in 2008 and the downtrend that ensued lasted for most of the year.  The early weakness in the currency stemmed from the fact New Zealand was one of the first countries to fall into recession. However looking ahead, the strong sell-off in the New Zealand dollar will also be the key ingredient to stabilizing the economy in 2009.  

Will the Recession Come to an End in 2009?

New Zealand is a tiny country that is particularly sensitive to the ebbs and tides of the global economy.  In 2008, growth contracted every quarter as the recession deepened. New Zealand has been hit hard by rising credit costs, slowing exports and a drought that crimped production. In the third quarter, GDP growth contracted by 0.4 percent and growth is likely to have fallen in the fourth quarter as well. The recession has forced companies to cut production and fire workers, driving the unemployment rate to a 5 year high in Q3.  This triggered a sharp contraction in consumer spending - retail sales fell 1.3 percent in the month of October, the largest decline since 2004. The jury is still out on whether the recession in New Zealand will come to an end in 2009.  Central Bank Governor Bollard is optimistic – he thinks the recession may already be over and believes fourth quarter growth could be positive.  However economists beg to differ – they expect GDP growth be negative in 2009.  We think that any further contraction in the New Zealand economy will be concentrated in the first half of the year.  The Reserve Bank has cut interest rates significantly, increased spending and lowered the income tax rate.  Combined with the weakness of the currency, this stimulus will contribute to a second half recovery.  

Inflation to Ease but Off Very High Levels

Like Australia, the latest consumer prices are from the third quarter and in Q3, the annualized pace of consumer price growth accelerated 5.1 percent, the largest increase in 18 years.  The weakness of the New Zealand dollar has played a large role in contributing to higher inflation pressures.  Therefore even though inflation will ease in 2009, it may not ease much because the New Zealand dollar is still weak and inflation is coming off of very elevated levels. With that in mind, the Reserve Bank of New Zealand may not care about the elevated level of inflation, as they remain committed to using monetary policy to stimulate the economy.

Dramatic Rate Cuts to Come to an End

The Reserve Bank of New Zealand has also been very aggressive with easing monetary policy this year, having cut interest rates by 325bp since July.  The last rate cut of 150bp was the largest ever for the Reserve Bank.  Such aggressive measures would lead one to believe that the RBNZ is looking to draw an end to their easing cycle as soon as possible.  This is true but not before interest rates is cut by another 100 to 150bp.  After the last rate cut in December, Bollard said that he believes rate cuts will come to an end in the middle of next year.  When the RBNZ signals that they are done cutting interest rates, we could see a sharp recovery in the New Zealand dollar as the fiscal and monetary stimulus hits the economy.  The drought that hung over the country in the first half of the year is finally over, offering some additional relief for New Zealand’s agriculture, dairy and beef industries.  

New Zealand Needs Australia to Recovery

In 2009, New Zealand dollar traders also need to keep an eye on Australia, the country’s largest trading partner.  If New Zealand wants to have any chance of recovering, we need to see the Australian economy stabilize first. Demand has not been increasing, while the weakness of the New Zealand dollar has been boosting the cost of exports.  The end result is a widening current account deficit.  For any country, a wider current account deficit is bearish for the currency.  Therefore if the Australian economy stabilizes and exports increase, then the deficit may narrow, helping to reverse the downtrend in the New Zealand dollar.  Thankfully this turn of events may actually happen in 2009 as the downturn in Australia is expected to be shallow.

Technical Outlook for the NZD/USD

The downtrend in the NZD/USD has lasted for most of the year.  According to the following chart, the currency pair remained within our Bollinger Band sell zone from June to the end of November.  However the trend began to change in December, after the currency hit a 5 year low against the US dollar.  It is now trading out of the Bollinger Band sell zone which suggests that a turn may be in place.  The closest level of resistance for the currency pair is 0.6085, which is December high and the 20-week Simple Moving Average. If it manages to clear that level, we could see a move up to 0.6345, the 38.2 percent Fibonacci retracement of this year’s entire sell-off.   On the flip side, if the NZD/USD breaks the first standard deviation Bollinger Band on the downside at 0.55, we could see a resumption of the year long downtrend.