On Wednesday, financial institution ING provided insights into the New Zealand Dollar’s (NZD) potential trajectory following the country’s latest consumer price index (CPI) data. ING anticipates that the exchange rate may continue to decline, potentially reaching the 0.5800 support level in the near future.

The first-quarter CPI figures in New Zealand indicated a year-over-year decline from 4.7% to 4.0%, aligning with market expectations. However, the non-tradeable inflation, which the Reserve Bank of New Zealand (RBNZ) closely watches, only slightly decreased from 5.9% to 5.8% year-over-year, contrary to consensus expectations of a more significant drop.

The slow deceleration in non-tradeable inflation reflects persistent pressures, possibly tied to the recent surge in net immigration, which has been a point of debate regarding its overall effect on inflation. The RBNZ has not made a definitive statement on whether the population increase is net-inflationary, given that it also helps to alleviate labor supply constraints.

The latest data supports the RBNZ’s hawkish stance taken at their April meeting. Market expectations are now leaning towards a 35 basis point cut in interest rates by the end of the year, which ING considers a reasonable forecast. ING’s own projection suggests a more aggressive 50 basis point easing in New Zealand this year, starting from October.

However, they also acknowledge the possibility of the RBNZ opting for a more conservative 25 basis point reduction, or potentially no cut at all, due to persistent inflation and a static Federal Reserve.

Despite the CPI release, the NZD did not experience an uptick, even as 2-year NZD rates sold off by 7 basis points. According to ING, the predominant role of risk sentiment in NZD trading currently overshadows domestic economic indicators.

InvestingPro Insights

Amid the discussions on the New Zealand Dollar’s potential trajectory and the Reserve Bank of New Zealand’s (RBNZ) monetary policy, it’s essential to consider the financial health and performance metrics of key market players. Here are some insights from InvestingPro that could provide a broader context to the economic indicators affecting currency movements.

One such company, which we’ll refer to as Company DX to maintain confidentiality, shows a mixed financial landscape. The company’s market capitalization is currently at 677.63 million USD, reflecting its value as perceived by the stock market. However, the P/E ratio, both current and adjusted for the last twelve months as of Q4 2023, stands at -45.48 and -49.02 respectively, indicating that investors have been paying more for the company’s earnings than might be justified by its net income.

Despite the negative P/E ratios, Company DX’s PEG ratio for the same period is 0.45, suggesting that the company’s earnings could grow at a rate that might make it a more attractive investment in the long term. Additionally, the Price / Book ratio is at 0.89, which could imply that the stock is potentially undervalued relative to its assets.

When it comes to revenue, Company DX experienced a significant decline, with a -84.89% change in the last twelve months as of Q4 2023, and a quarterly revenue growth of -35.86% for Q4 2023. This sharp decline is a critical metric for investors, as it could signal underlying challenges within the company or the sector it operates in.

InvestingPro Tips suggest closely monitoring the company’s next earnings date on April 22, 2024, as it could provide further insight into its financial health and future prospects. Another tip is to consider the company’s dividend yield, which as of the latest data, stands at an attractive 12.87%. This high yield could be a sign of confidence from the company in its ability to generate cash flows, or a red flag if it’s unsustainable.

For readers interested in a deeper analysis and more InvestingPro Tips, there are additional insights available on InvestingPro. Use coupon code PRONEWS24 to get an additional 10% off a yearly or biyearly Pro and Pro+ subscription, and unlock a comprehensive list of tips that can help you make more informed decisions.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

On Wednesday, ING, a prominent financial institution, revised its forecast for the US dollar, citing persistent inflation in the United States as a key factor driving a broad strengthening of the currency. The firm pointed out that while the US experiences a sell-off in rates, central bankers elsewhere are signaling potential rate cuts in the summer, suggesting an upcoming period of policy divergence and increased foreign exchange (FX) volatility.

ING has observed a significant upward trend in the US dollar over the past month, driven by consistent core US inflation rates of 0.4% month-on-month. This inflationary pressure has dampened expectations of early Federal Reserve easing. In contrast, the European Central Bank (ECB) is anticipated to begin an easing cycle in June due to lower-than-expected eurozone inflation, leading to a divergence between the monetary policies of the two regions.

The firm has adjusted its projections for the Federal Reserve’s policy, now expecting only three rate cuts this year, with a possibility of just two. This revision has led ING to lower its forecast for the exchange rate, no longer supporting a trade above 1.10 over the next 18 months, unless Fed rate cuts are completely halted or a geopolitical event triggers a significant increase in energy prices.

Beyond the EUR/USD pair, ING notes that FX volatility is on the rise, particularly as the market approaches potential intervention levels for . In the G10 currencies, the firm finds developments more intriguing with the likelihood of rate cuts from central banks in Canada and Sweden, in addition to the ECB.

In the emerging markets (EM), ING prefers the Polish zloty, bolstered by EU transfers and a less dovish central bank stance. However, the firm expresses concern for high-yield currencies like the South African rand with elections approaching in late May.

Regarding the Chinese , ING does not anticipate significant depreciation. In Latin America, the Mexican peso is expected to maintain its gains, while the Chilean peso may face vulnerability due to local rate cuts that seem overly aggressive.

InvestingPro Insights

In light of the recent analysis by ING on the US dollar’s strength, it’s important to consider the performance of various financial metrics. According to InvestingPro data, one company that may be impacted by these currency trends is DX, with a current market capitalization of $677.63 million. The company’s P/E ratio stands at -45.48, indicating potential investor caution, which aligns with a broader environment of FX volatility as noted by ING.

InvestingPro data also reveals a significant revenue contraction for DX, with a year-over-year decline of -84.89% in the last twelve months as of Q4 2023. This could be indicative of broader economic pressures that may be exacerbated by strong currency fluctuations. With a gross profit margin of 100% in the same period, the company’s profitability metrics remain robust despite the revenue downturn.

For investors considering the impact of FX movements on their portfolios, an InvestingPro Tip suggests closely monitoring companies with high foreign exchange exposure, particularly those with significant international operations or those in sectors sensitive to currency swings. Another InvestingPro Tip highlights the importance of looking at long-term trends in dividend yields, especially in times of market volatility; DX’s dividend yield currently stands at 12.87%, potentially offering an attractive income stream.

Investors seeking additional insights can find more InvestingPro Tips by subscribing to the service, with a special offer using the coupon code PRONEWS24 for an additional 10% off a yearly or biyearly Pro and Pro+ subscription. With 17 more InvestingPro Tips available, subscribers can gain a deeper understanding of market dynamics and make more informed investment decisions.

This article was generated with the support of AI and reviewed by an editor. For more information see our T&C.

(Corrects to delete quote in paragraph 6 following post publication review)

SHANGHAI (Reuters) -Chinese businesses are hoarding dollars because they expect their own currency to weaken, and that in turn is exacerbating a slide in the yuan that has been driven by wobbly stock markets and feeble growth in the world’s second largest economy.

This feedback loop has been playing out for months in mainland currency markets, spurred on by the dollar’s rising yield. Foreign exchange deposits have climbed $53.7 billion since September to $832.6 billion, People’s Bank of China (PBOC) data shows.

Analysts say one of two things needs to happen to end the downward spiral: the Federal Reserve needs to make deep rate cuts or the yuan needs to hit some form of a trough. Both seem distant.

is at five-month lows and has lost 1.9% to the dollar this year as foreign investors pull more money out of its struggling markets. The currency has fallen from around 6.7 per dollar at the start of 2023 to around 7.24 currently, a 5% drop.

Regular inflows from domestic exporters have dried up, as businesses choose to park their dollars offshore in deposits that earn them 6%, compared to 1.5% on yuan deposits at home, and just wait for better exchange rates.

“The rate differential between U.S. and China is the most positive since 2007, and I think this powerful fundamental fact is enough to explain why Chinese exporters are reluctant to exchange dollars for yuan,” said Alvin Tan, head of Asia FX strategy at RBC Capital Markets. “This huge positive yield spread is not evaporating anytime soon.”

Even for companies that choose to bring their dollars home, while authorities have capped dollar deposit rates at major lenders at 2.8% since the middle of last year, there are other dollar-based wealth-management products that invest in overseas funds offering as much as 4.4% for 7-day investments.

Becky Liu, head of China macro strategy at Standard Chartered (OTC:), says a “confirmation of the Fed rate cut including a clearer dollar softening trend” could be a catalyst for corporates to convert their foreign exchange into yuan.

However, if the recent string of robust inflation and economic data in the United States is anything to go by, Fed rate cuts are being pushed out to the end of 2024 and the dollar is on a tear.

That means it is more likely the yuan may hit 7.3, at which level exporters may bring dollars home, sensing authorities may shield it at that level. It was roughly the trough for the yuan in both October 2022 and July 2023.

Several investment banks also predict the yuan will weaken to 7.3 per dollar by the third quarter of this year, but no further. A Shanghai-based banker who deals with corporates said some of his clients are now eyeing 7.3 as the level to sell their dollars.

TERMS OF TRADE

Chinese authorities do not seem unduly perturbed by this accumulation of dollars by businesses and citizens. State banks that normally act on behalf of the People’s Bank of China (PBOC) have been buying the yuan to stem its slide.

The PBOC did not respond to a Reuters request for comments.

Lemon Zhang, a strategist at Barclays, says exporters’ “reluctance to convert their FX receipts will likely continue for the next two quarters”.

She does not expect Chinese regulators to force exporters to settle their FX receipts, but says there could instead be smaller macro prudential or tax relief measures to encourage conversion.

Despite the decline, the yuan has not fallen as far and fast as currencies of some of its trading partners, notably Japan whose yen is down 9% this year, which has eroded China’s trade competitiveness and dented its trade surplus.

China’s goods trade surplus fell 11% to $593.9 billion in 2023 from a year earlier.

Analysts at China Construction Bank (OTC:) estimate the FX settlement ratio, which measures conversion of export receipts to yuan, was just 51% in February as corporate clients placed dollars in deposits.