The Kiwi dollar has been falling significantly against the greenback as of late.
From the daily chart, we see that the NZD/USD has been on a continuous downtrend to a level of 0.6449 at the time of writing.
Source: investing.com
Let’s take a broader look at the monthly chart. We see that the currency has nearly erased all the gains that it saw against the USD in 2016.
Source: investing.com
During that period, the kiwi found significant strength thanks to rate differentials between New Zealand and other developed markets such as the United Kingdom and the United States. It’s only recently that this dynamic has been turned on its head and higher rates in the United States have led investors away from the NZD.
From an economic standpoint, we see that business confidence in New Zealand has been falling to a nine-year low:
Source: tradingeconomics.com
Contributing factors to this have been a declining housing market as well as growing construction costs and labor shortages, which have eroded small business profits.
As a result, while other major economies in the world are hiking (or at least getting ready to hike interest rates), the Reserve Bank of New Zealand has been forced to consider a rate cut further into the future, while holding the current cash rate at 1.75%.
As it stands, markets have priced in a 30 percent chance of a further rate cut by the Reserve Bank of New Zealand, and as a result the NZD has essentially lost its status as a “carry” currency, i.e. one that investors hold due to more favourable interest rates. Therefore, there’s no economic basis to justify that we would see a significant rise in the NZD – the conditions that were there previously do not exist anymore.
With this being said, while business confidence has continued to remain low, the economy has grown at a higher rate than previously forecasted for Q2 of this year. Specifically, GDP growth for Q2 was up by 1% compared to 0.5% in Q1.
However, the RBNZ is still preparing for the possibility of a further rate cut in the event that business confidence continues to go lower, and in terms of the NZD/USD itself, we see that the currency did not rise by a great magnitude in the month of September – even with higher growth rates being reported. The NZD/USD has since fallen:
Source: investing.com
Taking the above into consideration – the lack of business confidence in New Zealand leaves the possibility of a rate cut on the table for the Reserve Bank of New Zealand. Even if economic growth should continue to improve, it will take some time before this would translate into a rate hike, and even at that stage this would be unlikely to lure investors from currencies such as the U.S. dollar.
To conclude, I do not see any bullish case for the NZD/USD at this point in time, and I expect that we will see the currency fall further from here.
Disclosure: I/we have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours.
I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.
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