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The Week Ahead in FX Markets – Kiwi Opens in 0.64’s – Where Next?

Published October 8, 2018

By Phil Lynch

The kiwi opens at its lowest point since February 2016, and is on a slippery slope as markets sell the NZD in favour of other major currencies. There are few major market announcements this week (outside of US CPI data on Friday), so today I look at what we might expect in the coming 12 months on the NZD/USD.

First, a quick recap of what has kicked us even lower over the weekend.

Weekend Fall for the Kiwi

The New Zealand dollar is down across the board. There was little in the way of local news, and it appears the kiwi is still suffering from a negative interest rate outlook vs the other top 10 global currencies.

US Non-Farm Payrolls

Key US data on Friday night was overall disappointing vs expectations, with 134k new jobs added vs expectations of 185k new jobs. Average Earnings came in at 2.8% as expected. The Unemployment Rate dropped to 3.7% (a nearly 50-year low) but this was not enough to outweigh the overall modest feeling of the Payrolls report.

Sterling Rally on Brexit Deal Hopes

The largest mover over the weekend was the NZD/GBP, which fell 1.3% to 0.4907. This comes after EU’s Brexit negotiators said they believed a divorce deal with Britain was “very close”. Brexit deal negotiations have a 31 October deadline, though there is scope for ‘emergency’ negotiations to take place in November of December.

Outlook for the New Zealand dollar

With the New Zealand dollar out of favour, we thought it was time to put some facts around where the New Zealand dollar could go next. We start by looking at some factual evidence from long-term history.

Average Annual Range

The chart below (click to enlarge) shows the NZD/USD annual range in US cents for the past 20 years. The average (not including 2018) is 13.5 cents, or 20.9%.

So far in 2018, the range has been 10.1 cents. So, to keep up with the average there is further room for the kiwi to fall. Of course, these numbers are on average – in some years the range is much wider.

Should the NZD/USD see a directional move lower based on the average move in the last 20-years – the NZD/USD will be at 0.5095. A directional move higher, and the NZD/USD will be at 0.7789. These types of moves are not just entirely possible, they are entirely normal.

Reuters Professional Forecasts

Each month, Reuters compiles the forecasts of professional analysts (click the image to enlarge). The latest poll involved 36 analysts submitting their 1, 3, 6, & 12-month forecasts for the NZD/USD. The latest poll (taken last Wednesday), shows on average that analysts are bullish on the NZD/USD – with the median 12-month forecast at 0.6800 cents. Here are some of the top 12-month picks from local and large banks:

  • ANZ – 0.6100
  • BNZ – 0.6900
  • Barclays – 0.6300
  • Goldman Sachs – 0.7000
  • ING – 0.8000
  • Westpac – 0.6400

Implied Volatility – A Gauge of Risk

Market expectations can be measured, in theory, by implied volatility. Implied volatility is expressed as a percentage. In a nutshell, it can be used as a guide to how far the market expects the NZD/USD to move over the coming 12-months.

Implied volatility on the NZD/USD is currently at 9.0%. The theory tells us that markets can have confidence, with a probability of 95%, that the NZD/USD will stay between +/- 9% of current exchange rate levels. That is – between 0.7022 and 0.5862.

Of course – markets can be (and often are) wrong. So it is worthwhile including the risk of a directional move higher or lower, based on the 20-year history provided earlier. This is summarised in the table below.

How Low Can the NZD/USD Go?

So to answer the question everyone is asking: How low can the NZD/USD go?

  • Professional Analysts (ANZ) say 0.6100
  • Implied Volatility says 0.5862
  • A Directional Move based on the 20-year average says 0.5095
  • A Directional Move beyond the 20-year average – anyone’s guess

If you are looking at your FX positioning for the rest of 2018 and beyond, then these numbers should come into your thinking.