Morgan Stanley Sees Loveless Kiwi Sliding to Two-Year Low

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(Bloomberg) -- The worst is yet to come for the poorest performing Group-of-10 currency, Morgan Stanley says.

New Zealand’s dollar will drop another 4 percent by year-end as rising household debt levels leave the economy vulnerable to higher U.S. interest rates, the New York-based bank says. Kiwibank Ltd. is also negative it sees the terms of trade weakening, while technical analysis shows the currency is on the brink of breaking below a key support level.

“We’ve been bearish for a while,” said Daniel Blake, a strategist at Morgan Stanley in Sydney. “There’s a broad basket of highly levered household sectors, which include Australia, New Zealand, Canada and Sweden, which will all be negatively impacted by Fed tightening.” Australia and New Zealand have shown the highest correlation between housing and currencies, he said.

New Zealand’s dollar has dropped 6 percent against the greenback in the past month, the worst-performing G-10 currency over the period. The kiwi slid to a five-month low of 68.51 U.S. cents earlier this week before trading at 68.82 cents on Friday.

Morgan Stanley’s Blake predicts the currency will decline to 66 cents by year-end, which would be the weakest since March 2016, and down from as high as 74.38 in January.

New Zealand’s household debt as a percentage of disposable income climbed to a record 168 percent in the middle of last year and stayed close to that level at the end of 2017, the latest central bank data show. The cost of servicing that debt is set to escalate with the Federal Reserve poised to add to its six rate increases since December 2015 as soon as next month.

Economies such as New Zealand “have been most willing to take on cheap financing to boost domestic demand,” Blake said. “As these trends unwind, we see these highly levered household currencies underperforming.”

Rate differentials are also weighing against the kiwi. New Zealand’s two-year interest-rate swaps fell to 60 basis points below their U.S. equivalents this week, a record in data compiled by Bloomberg starting in 1993.

While the Reserve Bank of New Zealand’s policy rate of 1.75 percent currently matches the upper bound of the Fed’s target range, the U.S. rate will be more than 50 basis points higher than New Zealand’s in the coming year, overnight-index swaps indicate.

Kiwibank says the currency will come under pressure due to worsening in the terms of trade, the relative prices of a country’s exports compared with its imports.

“The terms of trade at current levels argue for a higher New Zealand dollar, but the outlook suggests a weaker terms of trade into 2019,” said Jarrod Kerr, chief economist at the company in Auckland. “That easing, alongside a deepening decline in our interest-rate differentials, should mean a weaker kiwi dollar.”

The currency will drop to 67 cents by year-end, he said.

New Zealand’s dollar initially advanced on Thursday after the government maintained its forecast for surpluses in the nation’s annual budget. Those gains only lasted a few hours, underscoring the headwinds facing the currency.

The kiwi’s technical position is also bearish. The currency is poised to close below a weekly support line that plots lows from August 2015 to November 2017, signaling further downside. An indicator of momentum, slow stochastics %K, also indicates it is likely to keep weakening.

©2018 Bloomberg L.P.

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