RBNZ maintains wait and see approach

by: Roy Teo

RBNZ maintains wait and see approach

The New Zealand dollar (NZD) received some support after the Reserve Bank of New Zealand (RBNZ) maintained their optimistic view that inflation is expected to increase from the current low levels as the expansion in the economy continues. Indeed, economic growth has been faster than trend rate this year, reducing unemployment and demands on productive capacity. The strong construction sector, high net immigration, interest rates which remain low by historical standards will continue to support the expansion in the economy. Indeed we think that the RBNZ will resume its monetary tightening cycle in the middle of 2015 bringing the cash rate from 3.50% to 4.25% by the end of next year. This is more optimistic that what the futures market is pricing in currently. However given that the market is significantly under-estimating the timing and pace of rate hikes in the US in our view, the NZD is therefore expected to underperform the US dollar towards 0.77 and 0.73 by the end of 2014 and 2015. This is consistent with the RBNZ’s view that current levels in the NZD remain unjustified and unsustainable and a further significant depreciation in the currency is expected.