Economic Outlook – NZ GDP growth is hitting its straps. Sizable contributions are coming from: construction (both residential and non-residential, and both in Christchurch and elsewhere, especially Auckland); very high terms of trade (along with improved agricultural production); heightened investment in plant and machinery; strong tourism inflows; an expanding manufacturing sector; improving retail sales; strong jobs growth; and, most recently, a surge in net immigration.
Interest Rate Outlook and Strategy – The market now prices the OCR will be at 4.50% in two years’ time. We see it at 5.00%. Both are a decent move higher from 3.25% currently. That outlook no longer seems an extreme outlier on the global stage, now that rate hikes from other Central Banks are creeping further into vision.
Currency Outlook – We update our short-term NZD/USD ‘fair value’ model with an improved US Shadow Short rate series, and use the opportunity to pull a few of the model’s levers. We assess the potential impact of (1) a return to more-normal levels of volatility; (2) a continued decline in NZ commodity prices; and (3) further contraction in the NZ-US interest rate spread.
Read the full report: FX Strategy