- Higher OCR aimed to prevent over heating
- Slower GDP growth in NZD
- Fall in dairy prices to affect the NZD TWI
- Falling CPI falling within RBNZ target
The kiwi has been showing marked weakness in the past quarter. The AUDNZD has appreciated over 600 pips since July of this year this represents a dramatic strengthening of the Australian dollar against the Kiwi. It is anticipated to have further gains in the coming months. The NZDUSD has plunged 1000 pips since July also representing a wakening kiwi against the dollar. The GBPNZD has also revealed remarkable weakness in the kiwi rising over 1500 pips.
At first glimpse the weakening of the kiwi seems to go against market expectations because NZD has the highest interest rate among the major currencies at 3.5%. The reserve bank of New Zealand raised the rates in July and this was immediately followed by an immediate tumbling of the NZD across the board.
Speculative flows into New Zealand that seek to make a profit from the interest rate differential have not been able to sustain the exchange rate against the bears fleeing the Kiwi because of the imminent slowdown in economy that the higher Overnight Cash Rate(OCR) will bring. The RBNZ was aiming to bring the Country’s CPI in check fearing that the above normal CPI especially in the housing prices would negatively affect the economy. Since its peak in February, the overall CPI has fallen over 12%. Inflation in the housing sector in New Zealand has fallen from 10% to 6%. This is despite an influx in net immigration for the past two quarters.
In September, the RBNZ took the view that the exchange rate has not adjusted well enough to reflect the fall in commodity prices. Dairy prices for instance have fallen dramatically since the first quarter of this year. This fall in all of New Zealand’s major exports is yet to be manifested in the exchange rates. We therefore anticipate that should the commodity prices retain their current low levels or go lower, a further fall in the kiwi becomes more and more imminent.
The fall in commodity prices is anticipated to find relief from the strengthening US economy. We anticipate that demand will pick up in the next few quarters. As for the effect of this to the New Zealand economy the US only commands about 8% of the exports from New Zealand, any direct gains from this increase in demand will be quite limited. In the back drop of a gloomy outlook for the New Zealand dollar and resiliently strengthening dollar a great approach is to short the kiwi against the dollar.
China which is the second largest trade partner for New Zealand is currently experiencing weaker GDP growth. There has been a marked reduction in demand for commodities in china. The Yuan (CYN) has however remained stronger against the New Zealand Dollar. The Chinese economy continues to grow at a 7.5% while the medium term expectations for the NZD are bleak. Under these conditions we anticipate a further depreciation of the NZDCNY.
Despite the higher interest rate differential. We anticipate that the Kiwi will continue to weaken in the medium term. A great approach under this setting is to maintain cautiously bearish bias towards the NZD in its pairs.
UK Nationwide Housing Prices highlighting the value of the houses prices in UK and indicate current movements in the housing market posted an increase of 1% in April, compared to the preceding month.
US dollar continued to weaken against a few currencies and managed to recover some ground against currencies like the Euro and the British Pound
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