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Goldman Sachs Research (高盛)
FX Views: Justified but Unsustainable: The Outlook for the Kiwi Dollar  Published 11:50 AM Fri Oct 3 2014
1. The Kiwi Dollar has recently witnessed an impressive weakening. Since early July it has depreciated by around 8% relative to its G10 peers, driven in part by an 11% weakening of NZD/$ (Exhibit 1). Despite the large depreciation, the RBNZ argued in a recent report (published on September 25) that it still sees the level of the exchange rate as “unjustified and unsustainable”, and that it believes the Kiwi Dollar is "susceptible to a significant downward adjustment over the coming six to nine months” (see here and here). But, given the sizeable weakness we have seen over the past two weeks, can that really still be true? And, if so, just how overvalued is the Kiwi? In this week’s FX views, we show that, based on structural factors alone, the Kiwi Dollar remains expensive. We continue to expect a sizeable depreciation of NZD/$ over the longer run, to 0.63, on the back of declines in New Zealand’s terms-of-trade, slow relative productivity growth and a protracted US cyclical outperformance. The recent move in the NZD has, in RBNZ speak, brought the exchange rate closer to “justified levels” based on business cycle drivers. But also over the short-to-medium term, we continue to see some downside risks to the tune of around 4% lower in both NZD/$ and in the G10 trade-weighted exchange rate.
2. The recent Kiwi weakness was sparked by the confluence of three relatively well-known factors, which dovetail with the fundamental arguments for a weaker NZD that we have previously laid out. First, there have been sizeable declines in commodity prices worldwide. The ANZ commodity price index, which tracks movements in the prices received for New Zealand’s main exports, has fallen by over 12% since it peaked in early January this year (Exhibit 1). The decline in New Zealand export prices has, in turn, been driven by a marked softening of the China growth outlook, in combination with a destocking cycle of dairy products in mainland China and, more recently, Russia’s ban on European dairy exports. Second, while the effect of the RBNZ’s intervention on the exchange rate in August remains unclear, the intervention period coincided with notable exchange rate weakness (Exhibit 2). At the same time, the mere announcement of the RBNZ’s August intervention on September 29 pushed NZD/$ down a further 2%. The threat of additional intervention should, in our view, deter any rapid bounce back in the Kiwi Dollar. Last, while New Zealand’s growth outlook is enviable compared with most of its G10 peers, since July both short- and long-term interest rate differentials have started to move in the US’s favour. This has, all else equal, helped subdue the ‘hunt for yield’ that has otherwise been so supportive for the Kiwi Dollar. Assessing the relative impact of these various factors is, of course, difficult. But a simple regression-based framework -- controlling for interest rate differentials, interventions, changes in risk-appetite and commodity prices – puts NZD/$ two-to-five big figures below its current value of 0.78 (Exhibit 3). In RBNZ speak, the current level of the exchange rate no longer looks as obviously ‘unjustified’ relative to where economic factors that typically explain currency moves over the business cycle would place it -- especially given the 11% move we have seen so far. However, a similar percentage overvaluation is found for the trade-weighted exchange rate. To achieve this trade-weighted decline during a period of broad-based US Dollar strength points to somewhat larger short-term downside risks for NZD/$ beyond the two-to-five big figures discussed directly above.
3. Going forward, we view the short-run risks to the Kiwi Dollar as tilted to the downside. This is based on two offsetting factors: First, while the New Zealand growth outlook has recently moderated from high levels (our CAI has fallen to 2.9%yoy from a peak of 4.9%yoy in February), we expect dairy prices to eventually recoup some of their losses from current levels. As we have argued elsewhere, we expect the China dairy inventory drawdown to slow and the decline in Chinese dairy production to draw in the direction of higher dairy prices. Admittedly, the most recent Fonterra auction saw prices fall a further 7%, so there is limited evidence of stabilisation at this stage. But international prices are now well below where we would judge marginal production costs would put them. While milk prices are difficult to forecast precisely, our model suggests a 10% recovery in milk prices would be worth up to a 3% appreciation in NZD/$. Second, in contrast after 100bp of tightening, the RBNZ curve has recently repriced lower: the relative weakening of the growth and inflation outlook has pushed down market expectations of RBNZ hikes by about 35-40bp over the next year, driving forecasts of the next rate hike close to the expected date of the Fed lift-off. Combining this with the RBNZ’s surprising eagerness to talk down the exchange rate, the environment does not look overly conducive to a rapid bounce-back in the Kiwi Dollar on the back of rising commodity prices. Add to that our expectation of continued broad-based USD strength, coupled with uncertainty about the growth outlook for China and New Zealand, the distribution of risks are tilted to the downside.
4. While the above framework demonstrates that the current level of the NZD may be closer to “justifiable”, the “unsustainable” label – i.e., the exchange rate is overvalued relative to where it would be expected to settle when shorter-term business cycle factors have dissipated – appears reasonable. Indeed, our longer-term end-2017 forecast of 0.63 for NZD/$ is a reflection of this view. Exhibits 4 and 5 show that, relative to our preferred GSDEER metric and based on purchasing power calculations and the Peterson Institutes’ FEER estimates, the Kiwi Dollar appears substantially overvalued (by on average 16%). Our longer-term end-2017 forecast sees a gradual normalization of the terms-of-trade as the driving force behind a correction of this overvaluation. But we also believe that a weaker relative productivity trend and higher inflation should contribute to this expected decline. The speed with which we approach our longer-term forecast will, in particular, depend on how far milk prices recover in the short run. It is worth noting that Prime Minister Key recently mentioned in a speech that ‘the desirable level’ for NZD/$ is close to 0.65 – not far from our end-2017 forecast and equal to our GSDEER fair value estimate.
5. The 19% additional depreciation we envisage over the longer term in NZD/$ is, clearly, large – even by historical standards. But, as Exhibit 6 shows, it is far from unprecedented. This time around, however, the drivers behind our expected decline are different. Previous incidents of large historical depreciation have – with the exception of the Great Financial Crisis – been episodes where New Zealand yields have fallen in tandem with US yields and terms-of-trade have softened only moderately. All of the large declines in Exhibit 6 were associated with periods of global recession or crisis as well as negative domestic growth. In contrast, over the longer run we expect a pronounced weakening of the terms-of-trade and a normalisation of the interest rate premium offered by New Zealand assets based on relatively stronger US growth to drive Kiwi weaker. The additional 19% downside we expect in NZD/$ should be seen in the context of a 16% appreciation of the USD against the G10 through to end-2017.
Alexandre Kohlhas, George Cole, Philip Borkin, Robin Brooks, Fiona Lake and Michael Cahill |
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发表于 2014-10-7 14:33:05
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wait n see.