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UBS sees NZD/USD on shaky ground amid economic headwinds

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UBS expressed caution regarding the New Zealand dollar (NZD), citing a challenging economic outlook and potential for underperformance against other major currencies.

The pair has been trading within the 0.59 to 0.62 range recently, with New Zealand’s relatively high-interest rates offering some support despite a weakening domestic economy.

Inflation in New Zealand remains high, influenced by factors such as rising unemployment, declining business confidence, and ongoing cost-of-living pressures that impact discretionary spending.

However, a slight recovery in dairy prices presents a potential upside to industry forecasts for the years 2024-2025.

The Reserve Bank of New Zealand (RBNZ) maintained a hawkish stance at its latest meeting, surprising markets by considering a rate hike. The central bank also adjusted its Official Cash Rate (OCR) forward track, hinting at a higher likelihood of further monetary tightening.

Nevertheless, RBNZ Governor Adrian Orr, in a recent interview, played down the chances of another rate hike as long as inflation expectations stay anchored. The near-term Consumer Price Index (CPI) forecasts were revised upwards, and the anticipated return to the target inflation band of 1-3% year-on-year was postponed until the fourth quarter of 2024, with a projection of 2.9% year-on-year.

Economic growth projections for 2024 were reduced to 0.4% year-on-year from the previous 0.9%, with UBS’s estimate even lower at 0.3%. The forecast for 2025 was also trimmed to 1.8% year-on-year from 2.5% year-on-year.

The 2024 Budget announcement by the New Zealand government underscored future challenges, with weaker growth expectations and tax cuts leading to an anticipated NZD 13.4 billion deficit in fiscal year 2025, representing 3.1% of GDP, up from an earlier forecast of a NZD 6.1 billion deficit.

UBS predicts additional government bond issuance, which could push yields higher than their current 10-year forecast of 4%. Regarding interest rates, UBS expects a 25 basis point cut in November and a 50 basis point reduction in February 2025, with a projected terminal rate of 3.25% by the fourth quarter of 2025, down from the current 5.5%.

From an investment perspective, UBS anticipates the New Zealand dollar to lag behind most G10 currencies over the next 12 months. They also foresee a rise in the pair to around 1.15 over the same period, suggesting a long position if the pairing drops to approximately 1.08 or lower.

While technical indicators show NZD is at the upper boundary of its Relative Strength Index (RSI) range and momentum has been positive, it appears to be waning. Key risks to the NZD/USD outlook include potential hawkish moves by the U.S. Federal Reserve, geopolitical tensions between the U.S. and China, and an unexpected rate hike by the RBNZ.

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

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PBoC adjusts policy amid rising USD demand

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The People’s Bank of China (PBoC) responded to increasing demand for the US dollar by adjusting its cross-border macroprudential parameter.

The central bank’s decision to raise the parameter from 1.50 to 1.75 allows domestic corporations and financial institutions to engage in more cross-border borrowing.

The adjustment came as the foreign exchange settlement balance for banks’ clients showed a deficit of $10.5 billion, marking the first negative reading since July 2024. This deficit contrasts with the previous month’s figures. The rise in demand for the US dollar was particularly noticeable in service trade transactions.

Recent weeks have seen domestic importers actively purchasing US dollars through foreign exchange forwards. This move is a strategy to hedge against potential risks associated with tariffs, which has contributed to an upward push on forward points.

The PBoC’s policy change on January 13 reflects efforts to manage market expectations regarding foreign exchange rates.

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

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Macquarie sees stable USD/CAD trend, eyes 1.35 mid-year target

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On Wednesday, Macquarie analysts provided insights into the potential future movements of the Canadian dollar (CAD) against the US dollar (USD).

They indicated that the fears of heavy-handed US import tariffs are unlikely to materialize immediately after the inauguration, suggesting that the USD’s rally against the EUR, CAD, and other currencies might not extend beyond the first quarter of the year.

The analysts highlighted that despite the initial threats of tariffs, Canada is expected to grow even closer to the United States in the coming years. This projection is based on several factors including Canada’s domestic politics, foreign policy, border and immigration policies, as well as trade and capital account flows, all of which demonstrate aligned interests with the US. The anticipated renegotiation of the United States-Mexico-Canada Agreement (USMCA) is expected to cement this relationship further.

According to Macquarie, this closer relationship between Canada and the US will lead to a much more stable exchange rate in the future. They predict that as a result of these developments, the USD/CAD pair will experience a downward drift, potentially reaching a mid-year target of 1.35.

The stability in the USD/CAD exchange rate is seen as a reflection of the ‘merger trend’ context, where the two economies continue to integrate and align, leading to less exchange rate fluctuation. Macquarie’s analysis projects a calmer period ahead for the currency pair, which has historically been influenced by trade policies and geopolitical factors.

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

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Dollar edges higher; Trump’s speech at Davos in spotlight

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Investing.com – The US dollar lifted slightly Thursday, but remained in a tight trading range ahead of a speech by President Donald Trump at the World Economic Forum.

At 04:15 ET (09:15 GMT), the Dollar Index, which tracks the greenback against a basket of six other currencies, traded 0.2% higher to 108.150, after starting the week with a drop of over 1%.

Dollar treads water 

The dollar has largely treaded water over the last couple of days as traders await more clarity over President Donald Trump’s plans for tariffs, following the sharp fall on Monday as his first day in office brought a barrage of executive orders, but none on tariffs.

He has subsequently talked about levies of around 25% on Canada and Mexico and 10% on China from Feb. 1, as well as mentioning duties on European imports, but without concrete action.

Trump speaks later in the session at the World Economic Forum in Davos, Switzerland, and traders are eagerly awaiting any comments on this topic as well as for his position on major geopolitical and economic issues such as the Ukraine-Russia war and the economic rivalry with China.

“This week’s dollar correction has not gone too far. Despite the heavy one-way positioning of the dollar, investors lack clarity on the timing of Trump’s tariff threats, preventing them from reducing dollar holdings,” said analysts at ING, in a note.  

Also causing traders to pause for breath is the spate of central bank policy decisions due over the next week, including the on Friday, ahead of the and the next week.

Euro lower ahead of ECB meeting

In Europe, slipped 0.1% lower to 1.0404, with the single currency weak ahead of next week’s ECB meeting, with an interest rate cut largely seen as a done deal.

“This week’s EUR/USD bounce has been pretty muted so far,” said ING. “There is no way investors can expect to hear an ‘all-clear’ signal on tariffs. And keeping trading partners off balance/guessing is a tactic that kept the dollar reasonably well bid during Trump’s last tariff regime in 2018-19.”

traded 0.1% lower to 1.2304, while rose 0.2% to 11.3035 ahead of a policy-setting meeting by the later in the session.

“Norges Bank is widely expected to keep rates on hold today,” ING said. “On the whole, the key variables monitored by NB have not clearly argued a rate cut should be pushed beyond March. Also, the risks to global growth related to Trump’s protectionism plans should encourage policymakers to allow some breathing room with a rate cut before the end of the first quarter.”

BOJ meeting to conclude Friday

In Asia, traded largely unchanged at 156.47, ahead of the Bank of Japan’s two-day policy meeting, which concludes on Friday.

The BoJ is widely expected to raise interest rates as recent inflation and wage data have been encouraging, and the central bank is likely to signal further interest rate hikes if the economy maintains its recovery

traded 0.2% higher to 7.2877, with the Chinese currency weaker on fears Trump will confirm US tariffs on Chinese imports, hitting the second largest economy in the world.

 

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