Kiwibank forecasts the New Zealand dollar will fall to 55c against the greenback by the end of the year.
That is good news for exporters and the tourism sector but bad for importers and Kiwis travelling overseas to most destinations.
Against the United States dollar the Kiwi is currently trading at 62c.
Falling commodity prices, narrowing interest rate differentials, and weakening risk appetite are working to push the dollar down, Kiwibank economists and currency experts say.
‘‘Late last year, we forecast the Kiwi dollar to fall to 55c by year-end. Most of the forecast decline takes place over the second half of 2023. Now we’re heading into the second half of 2023, and we’re expecting a meaningful correction lower.’'
And it’s possible the currency could fall even further.
‘‘Our downside scenario, with 35 per cent weight, has a free-falling bird without wings and a possible 47c low point. We have increased the weight on the downside scenario from 30 per cent to 35 per cent.
The 55c target is 55 per cent likely, while the economists rate a climb to 67c as just 10 per cent likely.
Key changes recently include the Reserve Bank’s statement it had finished hiking and the next official cash rate (OCR) move would be down from 5.5 per cent
‘‘Now we are ready to look for rate cuts, but probably not until early 2024. The RBNZ have engineered a recession to get inflation under control, and they may potentially have done too much.”
They say the Kiwi economy is at a weaker starting point, and they only see economic conditions deteriorating further from here. Key retail spending is lower, as consumers feel the pain from the massive tightening in interest rates. Business confidence is also significantly subdued.
‘‘There is not a lot of upside in the tarot cards for the Kiwi.’'
Offshore, other central banks also get to the pause stage, but some are still playing catch up as inflation remains relatively high.
Another key change in global economics is the outlook for growth in China.
After the easing of China’s Covid restrictions late last year, market participants were hopeful that the full reopening of China’s economy would help fuel growth, which would help to deliver a “soft landing”. But this is not to be, with China’s GDP looking lacklustre. And the near-term forecasts aren’t looking any better.
Kiwibank says strong New Zealand migration numbers will provide some relief, but not enough.
Commodity prices are suffering under a lack of demand, and the antipodean currencies are very much commodity price linked.
They also say credit conditions will also deteriorate from here.
‘Our pick is that the kiwi will head towards the 57c level before the year is out, but it won’t be in a straight line.’'
Commodity prices are softening and the terms of trade points to reduced purchasing power.
Interest rate differentials will work against the kiwi, especially against the USD. The RBNZ has finished hiking whereas the US Fed has more rate hikes to deliver.
“And finally, the ‘data surprise’ in Aotearoa remains in negative territory. Put simply, the economic data has come in well below analyst forecasts. We expect this to remain a theme over the second half of the year.’’
Kiwibank senior dealer Hamish Wilkinson says the NZD could also break last year’s low against the Australian dollar of 90c and fall to 47 British pence.