Analysts at MUFG Bank, see the NZD/USD pair at 0.5600 by year-end and at 0.5700 by the end of the first quarter of next year. They point out that the shift higher in the Reserve Bank of New Zealand (RBNZ) terminal rate helps support NZD but they warn downside risks to persist over the short-term.

Key Quotes:

“The New Zealand dollar strengthened in October against both the US dollar and the Australian dollar as the RBNZ continues to lead the way in terms of the cumulative amount of monetary tightening. Despite leading the way in tightening policy, there was no hint of any slowdown of change in stance. That helped trigger a re-adjustment in the estimate of the terminal rate in New Zealand.”

“The Q3 inflation data served to reinforce the need for continued policy tightening. CPI, the tradable and non-tradable measure were all stronger than expected in Q3 and even before the release of the inflation data Governor Orr in a statement coinciding with the release of the Annual Report stated that there was “more work to do” and that hiking the policy rate was the best course of action.”

“There is clearly a growing risk of the RBNZ overdoing it based on the potential for a disruptive correction in the housing market. IMF data shows New Zealand as more vulnerable than most countries.”

“We assume NZD/USD recovery next year as the Fed pauses but if the RBNZ hikes more than expected, it could act to curtail the scale of NZD recovery.”