Synopsis:

ANZ anticipates continued weakness for the New Zealand dollar (NZD) in the near term, driven by unfavorable market conditions and domestic developments.

Key Points:

• Market Conditions:

  • The current market backdrop is unfavorable for risk-sensitive currencies, with the ANZ Risk Appetite Index falling after a brief period of overly positive sentiment. Historically, such shifts lead to extended downside for the NZD and Australian dollar (AUD), as seen in early January and mid-July 2024.

• Domestic Developments:

  • The Reserve Bank of New Zealand’s (RBNZ) recent 50 basis point rate cut, coupled with expectations for further cuts, reflects growing disinflationary pressures in the economy. Indicators from the latest Quarterly Survey of Business Opinion show a rapid easing of price pressures and capacity constraints, as well as a cooling labor market.

• Upcoming Data Impact:

  • The Q3 CPI data release is crucial; historical trends suggest the NZD could experience downside if the non-tradables component underperforms. The overall negative economic outlook, along with easing inflation, supports potential upside for AUD/NZD.

• Target Levels:

  • While the NZD/USD is approaching oversold conditions on an RSI basis, ANZ predicts that any short-term bounce will not prevent a greater downside risk, targeting a drop to 0.60. For AUD/NZD, resistance levels are expected around 1.11–1.13.

Conclusion:

ANZ sees further downside for the NZD due to a combination of unfavorable market sentiment and domestic economic indicators. With potential targets set for both NZD/USD and AUD/NZD, the outlook remains cautious as risk sentiment continues to wane.