The New Zealand dollar could hit 90 US cents in a year's time, even though domestic economic growth will be lower than previously thought, investment bank Goldman Sachs says.
In its most recent foreign exchange forecasts, Goldman NZ economist Philip Borkin said the upwardly-revised forecast was based on a weakening US dollar, rather than stronger NZ economic fundamentals. Reinsurance flows into New Zealand due to the Christchurch earthquakes and Asian central bank reserve diversification would also support demand for NZ dollars.
"Notwithstanding the recent sharp correction (due to heightened risk aversion and market positioning), the NZ$ has been one of the best performing currencies in the G10 year-to-date, recently setting new post-float highs against the US dollar," Borkin said in Goldman's latest NZ FX commentary.
"While it is arguably a "dangerous" time to be altering currency forecasts, we are lifting our expectations for the NZ$ to 0.85, 0.87 and 0.90 against the US dollar on a 3-, 6- and 12-month view respectively (from 0.78, 0.79 and 0.80). This reflects the fact that markets were trading well through our previous forecasts and an expectation for ongoing structural head winds for the US dollar. Our expectations for the NZ$/A$ lift to 0.79, 0.81 and 0.82 on a 3, 6-and 12-month view (from 0.74, 0.75 and 0.75)," Borkin said.
"If risk aversion remains at elevated levels, the possibility of further near-term falls in the NZ$ cannot be ruled out. However, this may prove to be short-lived given improving domestic economic momentum and the weak US dollar outlook. Furthermore, non-fundamental drivers (reinsurance flows and Asian central bank reserve diversification) are also supportive," he said.
"Our forecasts are predicated on an expectation that global economic momentum will recover over 2H11 (notwithstanding recent downgrades to global growth) and there is no further disruption to financial market sentiment from debt concerns in both Europe and the US. But it goes without saying that these are the key risks to the outlook."
"This change in our NZ$ view is released in conjunction with other changes to our NZ economic forecasts where we have lowered our expectations for 2012 calendar year GDP growth to 3.4% (from 3.9%) and inflation to 2.5% from 3.1%," Borkin said.