Weaker New Zealand activity data, plunging business confidence and the pushing out of Reserve Bank policy tightening expectations had not helped.
On the global side, the risk of weaker growth and much weaker emerging currencies spilled over into the New Zealand dollar.
BNZ senior market strategist Jason Wong said the technical picture gave a mixed view on near-term prospects for the dollar. In the first half of the year, the kiwi had broadly-based falls. The largest falls were against the US dollar and the Japanese yen. There was little change against other commodity currencies like the Australian and Canadian dollars.
"The New Zealand dollar didn’t fall as much as expected against the Great Britain pound and euro while it fell more than expected against the yen."
Movements against the US dollar and Chinese yuan were in line with forecasts. The dollar did not rise as much as expected against the Australian currency, he said.
The dollar being weak across the board hinted at domestic factors in play.
The weaker performance of commodity currencies suggested some deterioration in the global economic outlook.
Commodity currencies like the New Zealand and Australian dollars fell alongside emerging market currencies which were seen as a positive play on the global economic cycle, Mr Wong said.
Strength in the US and Japanese currencies stood out. The surprising strength of the US dollar recovery could be attributed to relatively stronger US economic data and the country’s higher inflation outlook that drove more conviction in the outlook for tighter monetary policy.
The strength of the yen reflected weaker global risk appetite and dampened expectations the Bank of Japan’s yield curve control policy would soon change, with inflation moving further away from target, he said.
New Zealand monetary policy continued to act as a headwind for the dollar.
Reserve Bank monetary policy remained on hold and the June official cash review came across as slightly more dovish than the May Monetary Policy Statement.
The bank said the OCR would remain at 1.75% "for now" — having previously said "for some time".
The market now priced in — for the first time since the end of the easing cycle — a small chance of a rate cut over the next six months, Mr Wong said.
"We don’t think the bank will cut rates but the near-term risks slightly favour a rate cut than a hike over that timeframe — adding to downside pressure on the dollar."
The domestic data flow had not been encouraging for the dollar. Economic growth had been running at 0.5% to 0.6% quarter-to-quarter from the second half of last year through to the March 2018 quarter, barely positive on a per capita basis.
Business confidence had fallen to a seven-year low. Of particular concern was the impact the business operating environment was having on the expected profitability of corporates, he said.
Heightened uncertainty and falling profitability were potentially a nasty cocktail for future economic growth.
"The correlation between profitability and economic output is scarily close. Current profit expectations suggest considerable downside risks to our growth forecasts."
The BNZ started the year with a negative outlook for the New Zealand dollar trade-weighted index (TWI) and Mr Wong confirmed he maintained the view for the medium term.
The cycle for the dollar was looking much like the mid-1990s and the late-1990s cycles, when tighter global monetary policy led to a weaker TWI.
The TWI is a basket of currencies from New Zealand’s trading partners against which the dollar is measured.
The theory was tighter global monetary policy eventually led to weaker global growth to which the dollar was sensitive, he said.
BNZ forecasts showed some stabilisation in the TWI in the second half of this year before slipping again through 2019 and 2020. The current forecasts did not incorporate some of the downside risks emerging for the dollar in recent weeks and the BNZ was not wedded to the view.
Mr Wong stressed there were good reasons for not becoming overly bearish about the dollar.
New Zealand’s commodity prices had held up against a backdrop of generally falling agricultural prices.
Prices for the likes of milk fat, lamb, forestry and kiwifruit were performing much better than the likes of soybean, corn and wheat prices.
While the run of New Zealand data had recently been soft, it was seen as temporary. Fiscal stimulus was expected to help support growth in the second half.
Consumer Price Index inflation would reach 2% by the end of the year and the balance of risk was for core inflation to rise.
"Some higher inflation data could easily change perceptions about the next move by the Reserve Bank, helping to eventually support the dollar."
