Deutsche Bank thinks the Kiwi dollar should be weaker against the Aussie

Hannah Peters/Getty Images
  • The New Zealand dollar has been walloped this year, losing over 11% against the greenback since February.
  • Business confidence has fallen to recession-like levels, increasing fears over a sharp decline in business investment.
  • Deutsche Bank says caution is warranted when interpreting the plunge in business confidence. However, it still sees further weakness for the Kiwi against the Australian dollar.

Kiwis are down in the dumps, especially business owners.

According to data released late last month, business confidence fell to the lowest level since 2008, a period when the New Zealand economy was in recession.

It’s lead to increased concern that weaker confidence levels could lead to an equally ugly decline in business investment, including at the Reserve Bank of New Zealand (RBNZ) who continue to suggest the next move in official interest rates “could be up or down”.

Along with trade tensions, volatility in emerging markets and stronger US dollar, it has contributed to a steep decline in the New Zealand dollar.

Like the Australian dollar, it’s been walloped, sliding over 11% from the highs seen in February.

The NZD/USD daily chart below tells the story.

Investing.comNZD/USD Daily Chart

So are the concerns about business investment warranted?

Tim Baker, Macro Strategist at Deutsche Bank, isn’t entirely convinced they are, pointing out there’s likely a degree of bias among business owners when it comes to who’s governing the country.

“We note that business confidence has tracked actual CAPEX spending very well for thirty years [with] a correlation of 70%. But a closer look reveals an interesting wrinkle in the data,” he says.

“The correlation between confidence and CAPEX has tended to weaken in the past when Labour have held government. In fact the correlation even went negative, meaning reported confidence had nothing to do with the CAPEX spend businesses decided on.”

Deutsche Bank

Baker points out that other business activity indicators, such as ANZ Bank’s Truckometer index, are still quite firm at present, casting doubt as to whether businesses are about to cut back on investment.

So forget the negative sentiment Kiwi business holders are conveying, is now the time to go long the New Zealand dollar?

Not so fast, says Baker.

“This time is a little different,” he says.

“Labour governs in an unusual coalition, which could be increasing uncertainty for business. And there’s the issue that consumer sentiment has been dropping also, and now sits around two-year lows.”

In his opinion, this means that rather than totally dismissing the plunge in business confidence, it should be discounted as a factor.

However, despite his caution, Baker says the conviction around his prior view — that New Zealand’s growth superiority of the past three years is fading — is growing.

And that could see the New Zealand dollar fall even further against its Australian counterpart.

“Both consumer sentiment, and interest rates, have converged to Australian levels. Yet AUD/NZD is lagging the move, with a rate above 1.10 far more appropriate in our view,” he says.

“We like the current entry point to enter AUD/NZD longs.”

The AUD/NZD currently trades at 1.0899.

Investing.comAUD/NZD Daily Chart

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