Thinking of Trading the New Zealand Dollar? Check the Fundamentals!

DailyFX

Talking Points:

  • Below is a list of the major fundamental themes and headlines affecting NZ Dollar trading
  • The forecasted RBNZ rate hike in the first half of 2014 remains the major theme
  • RBNZ mentioned the rise in inflation as a reason for tighter policy

New Zealand Dollar Fundamental Factors

IMPACT LEVEL

EVENT TITLE

EVENT EXPLANATION

EFFECT ON CURRENCY

LAST UPDATED

High

Monetary Policy

The RBNZ kept the interest rate unchanged at 2.5% in December. The RBNZ said it will start raising interest rates in the first half of 2014 to fight higher inflation. Governor Wheeler said in December that the cash rate will need to increase 2.25% over the next 2 and 1/4 years.

Wheeler wrote in an editorial in October that a larger than expected cash rate hike may be required to slow the rise of house price inflation. He also said the RBNZ expects 2 percentage points of price increase from 2014 to the beginning of 2016. The RBNZ will turn to a rate hike, should loan-to-value restrictions fail to calm prices.

The RBNZ had said in September for the first time that an interest rate increase will likely be required next year, as inflation and economic growth pickup. RBNZ has kept the official cash rate at 2.5% since March 2011.

If the RBNZ raises the target interest rate, the NZ Dollar exchange rate should go higher.

A higher interest rate is NZD positive because it raises the yield for holding the currency and lowers the supply of NZ Dollars available to the market.

12/11/2013

High

Economic Growth (GDP)

The New Zealand economy grew 1.4% in Q3, the fastest quarterly growth pace in four years, following 0.3% expansion in Q2.

RBNZ Governor Wheeler said fiscal consolidation is curbing GDP, but he expects economic growth to strengthen over the coming year. The RBNZ said in December that the economy will expand by 2.8% for the year through March 2015, led by the rebuilding in Christchurch, then 2.1% growth in the year through March 2016.

Improved economic growth allows the RBNZ to tighten monetary policy and is therefore NZD positive.

12/18/2013

High

Inflation

Annual inflation rose to 1.4% in Q3, up from 0.7% in Q2. Consumer prices rose 0.9% in Q3 on a quarterly basis, following a 0.2% quarterly rise in Q2.

The RBNZ lowered its inflation forecast for 2014 to 1.5% from 1.9%, as the lower estimate reflects a stronger exchange rate.

RBNZ’s Wheeler has signed an agreement to keep inflation between 1-3% with a target on 2%. The

Higher inflation is NZD positive because it encourages the RBNZ to raise the interest rate to relieve price pressures.

10/15/2013

Medium

Employment

Employment rose by 1.2% in Q3, following a 0.4% rise in Q3. Unemployment fell from 6.4% in Q2 back to 6.2% in Q3. The participation rate rose from 68.1% from 68.6%.

Higher employment indicates a stronger economy and therefore allows the RBNZ to tighten policy, which would be NZD positive.

11/15/2013

Medium

Currency Intervention

RBNZ Governor Wheeler said in May that the central bank sold the Kiwi in foreign exchange markets. In October, Wheeler again said the NZD exchange rate is too strong and hampering exports.

However, given the new hawkish tone from the RBNZ, currency intervention is less likely. Although, Wheeler said in December that the bank doesn't believe the high exchange rate is sustainable in the long run.

The central bank may intervene to lower the exchange rate by selling the New Zealand Dollar. Higher exchange rates for NZD may hamper exports, which is why the RBNZ would intervene. Any currency intervention or talk of intervention is NZD negative.

12/11/2013

Medium

Christchurch Construction

New Zealand has spent 40 billion NZD to rebuild the city of Christchurch following a series of earthquakes in 2010-2011. The RBNZ has mentioned the construction as helpful for economic growth.

The Christchurch construction is helping raise the rate of economic expansion, which is NZD positive.

Ongoing

Medium

Currency Intervention

The New Zealand Dollar is a commodity currency and therefore benefits from the rise of demand for commodities traded from New Zealand. New Zealand's commodities include dairy products, meat, and wood products.

The New Zealand Dollar may rise and fall with other commodity currencies as well as the prices of commodities exported from New Zealand.

Ongoing

Low

Fiscal Policy

PM Key started a program to return the New Zealand government to budget surplus by 2015 through spending cuts. RBNZ Governor Wheeler has said that the government must reduce debt to strengthen the economy’s resilience to shocks.

Any forms of austerity is NZD negative because it hampers spending and affects the rate of economic growth.

Ongoing

Low

Risk Correlation

NZD/JPY has traded with a 0.50 correlation to the S&P 500 over the past year, and that correlation has risen to 0.56 over the past month.

That means that the Kiwi tends to rise against safe haven currencies like the Yen when risk appetite rises, and the trend has strengthened over the past month.

As risk appetite strengthens, NZD may rise against safe-haven currencies.

Ongoing

-- Written by Benjamin Spier, DailyFX Research. Feedback can be sent to bbspier@fxcm.com .

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