Barclays Research discusses NZD outlook and adopts a bearish bias over the medium term targeting NZD/USD around 0.62 by year-end.
"We expect recent NZD strength to reverse, and forecast further weakness into 2021. NZD gains versus the AUD and risk sentiment appear exaggerated and we think risk premia is too low given the still uncertain macro outlook and risks of more RBNZ measures. The RBNZ has already hinted that it could include foreign bonds under its LSAP program and has mentioned that negative rates are also under consideration, albeit in 2021. These policy choices could potentially weaken the NZD sharply and cannot be ignored, especially as the RBNZ forecasts also incorporate a sizable drop in the NZD TWI," Barclays notes.
"We think foreign investors could continue to unwind their NZGB holdings as RBNZ purchases crowd out other holders. The NZD will likely cheapen to help finance an already negative basic balance and portfolio outflows. While the domestic economy could recover faster with the elimination of COVID-19 cases, the external demand shock is likely to weigh heavily given the high dependency on exports, and tourism will likely remain a drag as borders remain closed to international visitors. We expect NZDUSD to weaken through our forecast horizon and expect NZD to underperform the AUD," Barclays adds.