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The New Zealand dollar is on the endangered currency list and financial conditions are now getting looser, Kiwibank head of trading Ross Weston says.
All technical support for the dollar was wiped out following the August Reserve Bank Monetary Policy Statement (MPS).
"We are now in a nervous period where we need to set a new trading range."
The range looked set to hit bottom at US65c and had a topside of about US67c, the previous low before the Reserve Bank MPS, he said.
Long-term, the direction would be decided by international trade outcomes. A more conciliatory outcome would mean the dollar rising, while further escalation or implementation of the $US200 billion United States tariff against Chinese goods would spell further downsides for the New Zealand dollar, Mr Weston said.
The NZD/AUD cross had melted lower following the Reserve Bank statement.
The market remained short on the New Zealand dollar which was no longer a buy because of its high-yielding status. Instead, it had become just the opposite, which is why positioning had now swungto extremely short.
"This means rallies from here are likely to be sold into, particularly while the Reserve Bank remains so incredibly dovish."
The Reserve Bank, along with most central banks, had wanted a weaker currency, he said.
The Reserve Bank had generally underestimated the strength of the dollar and for the first time in a long time, the dollar was below the central bank’s forecast track.
"That’s a nice ‘problem’ or forecasting error to have. If the bird remains in a lower for longer flight path, there’s a good chance we get better than expected economic outcomes."
A lower dollar boosted export revenue, growth and inflation expectations.
The dollar had benefited from the lift in New Zealand terms of trade.
Following the Reserve Bank’s August statement, Kiwibank was forecasting interest rates to favour an even weaker currency.
Kiwibank predicted a mild depreciation to US67c in 2019, noting it was not a large move but a move in the right direction.
"The move to US67c occurred a lot faster than we expected. Going through the tea leaves, we now see the kiwi gliding lower to US63c next year. Again, we don’t see this as a big move, but the right move."