NAB: Here's why the New Zealand dollar could get slammed

Photo by Hannah Peters/Getty Images

Like its namesake across the Tasman, the New Zealand dollar has enjoyed a stellar rally over recent weeks. Fuelled by a turnaround in risk sentiment stemming from recent weakness in key US economic data, the Kiwi has ripped higher, rising more than 7% from its September 23 low to currently trade at .6678. However, according to the NAB’s FX strategy team, while things are looking good for the Kiwi at present, it is unlikely to last.

“NZD/ USD’s rally through 0.66 comes courtesy of a remarkable turnaround in risk sentiment. The recent disappointments in US data (non-farm payrolls, in particular) have given succour to the view that US rates will remain low for a little while longer,” they wrote in a research note released earlier this morning.

“Having been downbeat of late, global investors decided to take a “glass half full” approach to this news. Equities, commodities, and emerging market currencies are all sharply higher from late-September levels.”

The chart below, supplied by the NAB, reveals the strong correlation that presently exists between the NZD/ USD, CRB commodity price index and Bloomberg-JP Morgan Asia dollar index. It suggests that the Kiwi is presently benefitting from improved investor sentiment rather than anything fundamentally attached to the currency. It’s “risk on” at present, polar opposites to the “risk off” sentiment seen earlier in the year.

Although the NAB suggests that the recent Kiwi rally could continue over the short term, particularly should speculative short positioning continue to be trimmed and stability in the Chinese renminbi persist, they believe that over a longer term horizon risks remain squarely to the downside.

“After this current squeeze in risk assets loses steam, we feel the balance of risks favour NZD downside,” they wrote.

“Only in two of our six scenarios does NZD gain, and we only assign a combined 20% chance of those scenarios occurring. What’s more, in our highest probability scenario, NZD gets slammed by the twin shocks of rising US rates and higher volatility.”

Fitting with their belief that longer term risks to the NZD/ USD remain to the downside, they have left their forecasts for the Kiwi unchanged, predicting that the currency will fall to as low as .6000 against the USD by the end of the March quarter 2016. Beyond that, they expect the Kiwi to crawl higher from the middle of next year, forecasting the currency to trade at .6200 by the end of 2016.

In early Asian trade on Monday the NZD/USD currently buys .6678.

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