New Zealand Dollar to Hold Range Ahead of RBNZ
Fundamental Forecast for US Dollar: Neutral
- New Zealand Dollar Flat As Service Sector Remains Expansionary
- Kiwi Surges As N.Z First Quarter CPI Rises Less-Than-Expected
- Risk-On Sends Pound, Kiwi Higher on the Back of the Yen
The New Zealand Dollar ended the week nearly 2.0 percent lower, a dramatic turnaround from previous weeks. After disappointing Chinese data showed slower than expected growth in New Zealand’s biggest business partner, investors were forced to reconsider their positions in the kiwi. In addition, weak US data and a collapse in the prices of precious metals dragged down risk-linked currencies like the New Zealand Dollar. On the other hand, New Zealand’s first-quarter Consumer Price Index met economists’ forecasts and has grown at a steady pace. Looking forward, given this positive and negative momentum, we may see the kiwi rebound within range.
The main event risk for the New Zealand Dollar next week comes in the form of the central bank rate decision scheduled for Tuesday. Currently, the country’s overall inflation pressures remain subdued, growing at a pace below the Reserve Bank‘s bottom target range for the third consecutive quarter. Recently, the currency’s high exchange rate has placed downward pressure on the price of traded goods such as imported household items. According to the RBNZ there are some growing concerns over the “current escalation of house prices”, which continue to climb, particularly in the country’s two largest cities, Auckland and Christchurch. However, the increase in rents and construction costs are not as significant as expected and there is little sign of a spillover in rebuild-related inflation in other regions of New Zealand outside of Canterbury. Domestic inflation is expected to rise gradually with the economic recovery, but is likely to remain in the bottom half of the central bank's target zone throughout the rest of this year. Consequently, the RBNZ’s inflationary concerns are minimal and the RBNZ may hold interest rates at record lows in order to boost jobs and help exporters who are hampered by a strong kiwi.
On the Chinese data front, the April Manufacturing PMI and Business Sentiment Indicator reports will be the top drivers for the New Zealand Dollar. New Zealand’s small market size limits its global competitiveness and the nation’s economy has become closely correlated with that of China, similar in nature to the relationship between Canada and US. Despite China’s first-quarter GDP shortcomings, the nation’s recovery continues to be lead by improving domestic demand. As we discussed last week, signals continue to suggest that China is moving away from export-led growth to import-led growth. During this transition period, we may see some volatility and a subsequent economic slowdown in the short term. In the long term, however, China’s enormous population (1.3 billion) has the potential for significant consumption should individual savings be reduced from their current levels of 50% of income. This long term perspective adds positively to the outlook of New Zealand and its currency.
The pace of the kiwi's weekly decline slowed following a Bloomberg News report concerning a G-20 draft statement, which affirmed a commitment, among the 20 nations, to avoid purposely weakening their currencies in order to gain a trade advantage. Previous gains in the Kiwi were largely driven by the increasing demand among investors who were looking for positive returns outside of Japan. As a result, traders should focus on the G-20 meeting over the weekend, as markets will look for any comments about Japanese currency intervention.
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