According to the NAB FX Strategy Team, the global economic outlook remains a key factor for the NZD over the rest of the year.
“Last week the NZD underperformed again, this time driven by slightly softer CPI inflation data. The weak headline figure and lack of upward pulse in the core inflation measures reduce one hurdle for an OCR rate cut over coming months.”
“Global factors last week were largely offsetting for the NZD. Stronger China activity data added to the evidence that Chinese economic momentum was no longer to the downside, supported by easier monetary and fiscal policy. This helped support the NZD but the positive impact was reversed later in the week after weaker than expected euro-area PMI data.”
“The NZD finds itself after the Easter break around 0.6680, with the year-to-date low of 0.6652 made on 2 January (excluding the flash crash on 3 January) now in sight. The gap between the spot rate and our short-term fair value estimate is the greatest it has been this year, with the NZD 3½% “cheap”, in an environment where risk appetite and NZ commodity prices have been tracking higher. This valuation gap isn’t statistically significant at this stage, but is indicative of the NZD trading on the cheap side of fundamental fair-value.”
“The recent fall in the NZD puts it back down at the lower end of its trading range seen since November and is no cause for panic. Indeed, our projection for the end of June has sat unchanged at 0.67 since our last forecast revision back in December.”
“Market volatility across a range of financial prices is suppressed and this has supported an upward bias to our risk appetite index, spending all of April in a risk-loving 60-70% range. Some sort of global shock would cause vol to increase and risk appetite to fall and would be negative for the NZD. This is the biggest threat for a break for the NZD to the downside.”
“The bottom of the trading range is currently threatened, with support at 0.6650 – near the year-to-date low, excluding the 3 January flash-crash.”