FX comment – NZD lower after RBNZ states strong NZD is unwelcome

by: Roy Teo

  • Strong NZD unwelcome
  • RBNZ to keep monetary policy unchanged well into 2016
  • Strong NZD to trigger more aggressive intervention


Strong NZD unwelcome

The New Zealand dollar (NZD) declined by 60 pips to 0.7580 after Reserve Bank of New Zealand (RBNZ) assistant governor McDermott said that the appreciation of the NZD while key export prices such as dairy have been falling is unwelcome. In addition though he stated that the recent decline in headline inflation due to lower oil prices is unlikely to trigger a rate cut, uncertainty surrounding the outlook for capacity pressures remain. This is due to the lingering effects of the recent drought in parts of the country, fiscal consolidation, lower dairy incomes and the impact of the exchange rate on export and import substitution industries. It would be appropriate to ease policy if there are evidence of weakening demand and domestic inflation.

RBNZ to keep monetary policy unchanged well into 2016

As consumer and business confidence are above historical average and the domestic economy remains resilient, we do not expect the RBNZ to cut interest rates. An acceleration in house price growth in recent months is likely to be addressed by new macro prudential tools. Indeed the RBNZ recently stated that monetary policy cannot be used to dampen housing demand and that other actions including tax preferred status of housing should be explored. Non tradable inflation which has declined from 3% in 2014 Q1 to 2.3% in 2015 Q1 is likely to ease lower if house price gains can be addressed.

Strong NZD to trigger more aggressive intervention

In the absence of rate cuts, we think that the RBNZ has no choice but to intervene in the currency market to weaken the NZD. Though we acknowledge that intervention has not been a successful strategy historically, it does work when the currency is trading at extreme points. Furthermore intervention will warn speculators that the direction in the currency is not a one way bet. Indeed the RBNZ has net sold almost NZD 600m since the beginning of 2014 when New Zealand key commodity export prices have started to decline. The latter has declined by more than 10% while the NZD has strengthened against its trade weighted basket of currencies. The divergence between the exchange rate and dairy prices is even more appalling with dairy prices plummeting by 40% in the past one year. We think that the NZD is likely to trade lower towards 0.68 by the end of this year given its stretched valuation and high concentration of foreign investors’ position in local government debt.