Although the New Zealand Dollar firmed after the Reserve Bank of New Zealand (RBNZ) recently surprised markets by opting to avoid cutting the overnight cash rate, recent revelations of links between Prime Minister John Key and Mossack Fonseca has reduced demand for the ‘Kiwi’ (NZD).
NZD Exchange Rate Overvaluation a Persistent Threat
Much to the surprise of the majority of analysts, the most recent RBNZ interest rate decision saw policymakers leave rates unchanged. This was despite persistent concerns regarding significant overvaluation of the domestic currency. The move was met by a flood of demand for the ‘Kiwi’, which appreciated significantly versus its major peers.
Even generally damp market sentiment, with China’s economic woes remaining an issue, was not enough to provoke depreciation. A drop in dairy prices aided a fractional downturn, as the combination of low dairy prices and a high trade weighting has a damaging impact on New Zealand’s economic prospects.
However, these headwinds have been somewhat offset by increased speculation of long-term delays to a Federal Reserve rate hike. The prospect of US borrowing costs remaining at current levels gives New Zealand’s central bank more time to address changes to policy without fear of significantly widening policy divergence.
GBP/NZD Exchange Rates Advance despite ‘Brexit’ Uncertainty
On Tuesday of this week the New Zealand Dollar reversed recent trends and declined versus its major peers. On the day, the Pound Sterling to New Zealand Dollar (GBP/NZD) exchange rate advanced by around 0.8%. This is despite improved market sentiment following positive Chinese inflation data.
The British Pound managed to eke out daily gains versus a number of its major peers on Tuesday in spite of mixed domestic ecostats. Whilst the monthly readings for March’s British Trade Balance data showed that the deficit narrowed beyond expectations, the quarterly reading showed that the deficit widened the most in 8-years.
Sterling appreciation, therefore, is most likely the result of easing ‘Brexit’ concerns after former NATO and US Security Chiefs urged the UK to remain in the European Union. Even a survey showing that the gap between big business officials who want to remain and those who want to leave has narrowed considerably wasn’t enough to offset Sterling gains.
The GBP/NZD exchange rate appreciation can also be linked to the lack of demand for the ‘Kiwi’ despite risk-on trade. The latest revelation in the ‘Panama Papers’ that a number of New Zealand’s officials had links to offshore accounts has been met with reduced demand for the Oceanic unit. What’s more, Prime Minister John Key has been accused of having close ties to Mossack Fonseca.
‘RBNZ Might Respond to Rising Asset Prices via Macroprudential Policy’ – Westpac
Whilst the current outlook for the New Zealand Dollar is neutral/negative, the ‘Kiwi’ is still very much overvalued. Analysts at Westpac have accordingly warned that New Zealand needs to prepare for the prospect that global inflation will rise. ‘One day global interest rates could rise, and if they do, global asset prices could come under downward pressure. In New Zealand the possible manifestation would be rising mortgage rates and falling house prices. The Reserve Bank must ensure that New Zealand’s financial system is strong enough to withstand such a possibility,’ stated Westpac.
One solution that Westpac suggests, if RBNZ officials are not prepared to cut the OCR further, is to adopt macroprudential stimulus, stating;
‘The latest labour market figures confirm that the New Zealand economy is doing well despite the dairy downturn, aided and abetted by low interest rates, rising asset prices and more borrowing. These trends are uncomfortable, but there is little New Zealand can do about them. The price of refusing to lower the OCR would be an unacceptably strong exchange rate. Instead, the RBNZ may respond to rising asset prices via macroprudential policy.’
The Pound Sterling to New Zealand Dollar (GBP/NZD) exchange rate was trending within the range of 2.1283 to 2.1487 during Tuesday’s European session.
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