NZD/USD to drift higher on a more sustainable basis later in the year – MUFG

During May, the New Zealand dollar appreciated modestly against the US dollar from 0.6473 to 0.6502. Economists at MUFG Bank expect the kiwi to strengthen on a more sustainable basis later in the year.

Aggressive tightening well priced so only moderate gains ahead

“The hawkish action from the RBNZ should help limit further declines from here although some renewed selling seems plausible to us given financial conditions could tighten again.”

“The RBNZ now predicts the policy rate reaching 3.25% this year and 3.95% by Q3 2023. That guidance is now more than fully priced suggesting the upside for short-term yields in New Zealand is now limited.”

“If financial conditions continue to tighten, the RBNZ is unlikely to deliver what is currently priced. However, the Fed will also not deliver what is priced and assuming China downside risks recede later in the year and risk aversion recedes then NZD/USD can drift higher on a more sustainable basis.” 

“New Zealand’s terms of trade should also provide support. Food prices are set to rise and food makes up a large portion of New Zealand’s key exports. New Zealand is also planning to increase wheat production in order to benefit from global shortages”.