The New Zealand dollar’s price movements against the US dollar during the fourth quarter of 2007 were relatively placid compared to the quarter prior, when the NZD/USD whipped around in a more than a 1,000 point range. However, with the Reserve Bank of New Zealand remaining focused on inflation risks – as consumer prices are expected to remain uncomfortably high going into early 2008 – the Kiwi dollar has remained supported and continues to rise within an ascending channel. Until the central bank shifts their inflation stance to a more neutral posture, the New Zealand currency is unlikely to lose its luster as one of the best high yielders in the currency market..
Consumers Tighten The Purse Strings Going into Q4 – Downhill from Here?
According to the government’s third quarter growth report, the economy expanded by 0.5 percent, the slowest pace of growth in a year. Even though the labor market remains tight, high interest rates curbed consumer spending while a rising currency crimped exports. Signs of a slowdown are clearly emerging, which suggests that growth was far more anemic in of the fourth of 2007 and could continue to remain weak into 2008. Indeed, RBNZ Governor Alan Bollard’s efforts to cool inflation risks emanating from domestic demand and housing market growth have finally started to bear fruit after the bank hiked rates four times this year to a record high of 8.25 percent. Retail sales dropped for the first time in four months in October at a rate of - 0.7 percent, and excluding autos, the reading was even worse at -1.1 percent as gasoline and costs for basic food items surged. Consumer spending fell to an 18 month low while business sentiment dropped for the second month in a row in December. New Zealand companies such as Hallenstein Glasson Holdings Ltd., the country’s third-largest publicly traded retailer, have also seen their shares drop quite a bit amidst weak outlooks for early 2008 given “tightening demand.” With the housing market in the country starting to falter, these forecasts aren’t entirely surprising. Early in December, RBNZ Governor Bollard said that housing “is a big driver of how much spending goes on at home” and that he expected the market to keep slowing. Indeed, with REINZ home sales down 21.6 percent in November from a year earlier, it is difficult to find a reason to be optimistic about the sector. Nevertheless, this is exactly what the RBNZ was aiming for when they aggressively tightened monetary policy in the first place.
Will Softer Spending Cool Inflation? It’s Up To The RBNZ To Decide.
RBNZ Governor Bollard noted in his policy statement in December that “a substantial income boost is still expected to occur through 2008, as recent dairy price gains reach farmers.” This effective increase in wages for farmers only adds to the bank’s concerns regarding building price pressures, as the statement also said “inflationary pressures have increased, and interest rates are now likely to remain around current levels for longer than previously thought. We believe that the current level of the OCR remains consistent with future inflation outcomes of 1 to 3 percent on average over the medium term, based on the information to hand at present.” With the New Zealand economy apparently shielded from the wrath of a credit crunch that is throwing a wrench in the US and European financial markets, it is clear that the RBNZ has no intent to even consider cutting rates until mid to late-2008.
Does Risk Still Matter For The High-Yielder?
The New Zealand dollar has not been impacted as heavily by bouts of risk aversion recently, particularly when compared to the currency’s bipolar price action during the third quarter. In the world of rate differentials, the New Zealand dollar was the optimal yielding currency for the popular carry trade strategy, as the country touted the highest overnight lending rate among countries with the highest sovereign debt rating. However, shake ups in the credit markets have made the Kiwi dollar and its inherent risk less attractive, and the NZD/USD has subsequently reverted to range trading. Nevertheless, with interest rates in the country likely to remain lofty for quite some time and commodity prices – especially in agriculture – trading at or near record highs, upside potential remains during the next few months for the NZD/USD.
Key Points
The Reserve Bank of New Zealand’s aggressive monetary policy tightening cycle in 2007 has finally started to impact various aspects of the economy, such as consumption and the housing market. Domestic demand growth as a whole, however, may be more difficult to quell as exporters continue to thrive in the face of surging commodity prices. Furthermore, New Zealand has been fortunate enough to avoid the wrath of a credit crunch that is wreaking havoc in the US and Europe. As a result, the RBNZ cannot let their guard down anytime soon when it comes to inflation risks, and the bank’s staunchly hawkish bias will underpin the case for a strong NZD/USD in coming months. However, when inflation pressures finally start to subside and the New Zealand economy begins to decelerate under the weight of record high interest rates, Kiwi bulls will have to call it quits and start to bet that the RBNZ’s next policy move will be a cut.
NZD/USD Technical Outlook: Significant Decline to 60 Cents Expected – By Jamie Saettele
Our longer term count for the NZDUSD has not changed. We still expect a significant decline, with price eventually coming under .5927. This decline could take up to a year or more though. The rally from .3897-.7463 was in 5 waves. The decline into .5927 and subsequent rally to .8108 are waves A and B of an expanded flat. As long as .8108 remains intact, it is our contention that wave C is underway towards .5927.
Al Bawaba
