Currency analysts at BMO Capital Markets forecast that the New Zealand dollar will be a laggard in the complex of commodity currencies. In their opinion, the global fuel price spike will continue to have a negative impact on the country’s trade dynamics.

In their monthly currency outlook update, analysts say the New Zealand dollar will also struggle as the Reserve Bank of New Zealand (RBNZ) could become one of the first major central banks to announce an end to the cycle of interest rate hikes.

New Zealand “had a moment when its economy seemed the most COVID-resistant in the G10, allowing the RBNZ to come out ahead in tightening monetary policy,” says Greg Anderson, global head of FX strategy at BMO Capital Markets.

“Despite NZ having the highest overnight rate in the G10 (the RBNZ sets the rate at 2.00%), the NZD has not performed well during the global tightening phase,” says Gallo. (You can set up a rate alert here).

The RBNZ raised the official cash rate to 2.0% in the face of inflation, which reached 6.9%.

This has provided some support to the New Zealand dollar through the interest rate channel, but the market now expects a further 230 basis point rate hike before the end of the year.

The failure of these expectations to provide further support to the New Zealand dollar suggests that RBNZ policy is no longer accommodative and could become outright bearish.

“We are now approaching the point where markets will start to speculate about which central banks will be the first to stop tightening,” Gallo says. “The RBNZ is probably the prime candidate.”

The New Zealand dollar rose sharply in value in February and March as Russia’s invasion of Ukraine sent global commodity prices, including agricultural goods that New Zealand specializes in producing, soaring.

The Bloomberg Agricultural Price Index is up 28% in 2022 and 35% year-to-date.

This index has traditionally been highly correlated with the New Zealand dollar, Gallo explains.

“However, this correlation has broken down over the last year,” he adds. “We believe the reason is that rising commodity prices have not yet helped NZ’s external balance sheet (unlike Australia and Canada).”

“With very few tourism exports and soaring energy import prices, NZ’s trade deficit has ballooned,” Gallo says.

BMO Capital Markets believes New Zealand’s external balance should improve over the next 6 months.

“However, given the dependence on foreign energy, we believe the New Zealand dollar will underperform other commodity currencies,” Gallo says.

BMO Capital forecasts the New Zealand Dollar to US Dollar exchange rate to trade at 0.61 on a one-month horizon, 0.61 on a three-month horizon, 0.62 on a six-month horizon and 0.65 on a one-year horizon.

With the spot currently at 0.6315, this would imply further deterioration in the near to medium term, with implications for other NZD crosses.

Such a profile could support the Pound against the New Zealand currency and implies the potential for further, albeit modest, gains.

The Pound to New Zealand Dollar exchange rate hit a low of 1.8713 on April 05 after a sharp drop following Russia’s invasion of Ukraine.

A surge in commodity prices lifted the New Zealand dollar and sank European currencies such as sterling.

But commodity prices stabilized and have since started to decline, giving the pound a chance to recover.

If BMO Capital is right in its forecasts, GBP/NZD may rise further, all other things being equal.