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NZD: Supported, despite possible growth hiccup - ANZ

Philip Borkin, Research Analyst at ANZ, suggests that they are cautious on the near-term growth picture of NZ economy, but believe this is now largely in the NZD price and a favourable global liquidity and volatility backdrop should mean a reasonable environment for carry should persist.

Key Quotes

“An eventual turn in the global liquidity cycle will drive another leg lower, but we don’t expect that just yet.”

“We believe much of the bad news that has propelled the NZD lower over recent months is now in the price. We are circumspect about the near-term growth picture as a new political direction creates some unease and the economy grapples with a soft housing market and weaker business sentiment. As the economy’s growth drivers transition with capacity pressures biting, we believe these factors are now reasonably well appreciated.”

“We see modest upside for the NZD. Not only do we see any domestic growth hiccup as short-lived, but we remain constructive on the global growth outlook. Historically a rising NZD has been consistent with a positive global picture. Favourable global liquidity and volatility conditions should ensure a fair environment for carry. The terms of trade is also effectively at an all-time high, so the NZD is now below our estimates of structural fair value, making a valuation case for further moves lower harder to justify.”

“A more pronounced turn in the global liquidity cycle will drive a further move south, but that is not on the cards just yet. As global central banks are eventually forced to respond to less inflation headroom, the current benign global carry conditions will be challenged.That will put the NZD back on the defensive. However, we see that as more of an H2 2018 story.”

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