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3 Apr 2014
NZD to keep up strong performance - Rabobank
FXStreet (Bali) - Jane Foley, Senior Currency Strategist at Rabobank, comments on the latest developments in the NZD market, noting that despite the sharp decline in Fonterra’s milk auction prices, NZD should continue to perform well this year.
Key Quotes
"NZD/USD dropped sharply overnight with the trigger from the move being the slump in Fonterra’s milk auction prices. The Global Daily Trade index dropped a whopping 8.9%, the biggest drop in a year and the fourth consecutive fall at the fortnightly auctions. The index is now down 17% y/y reflecting unseasonably high levels of wholemilk powder volumes in New Zealand as well an uptick in supply from Australia and the US and a reported easing of demand from China."
"In September 2013 the RBNZ warned that the strength of the housing market was having a knock on effect on inflation and in doing so it set the groundwork for last month’s 25 bps rate hike. Further rate hikes are anticipated by the market and this is another factor behind the recent strength of the NZD.
"Yesterday the IMF reported that the NZD was around 5-15% overvalued. The danger is that currency strength will crowd out other non-dairy exporters and potentially even reduce NZ’s dominance of the milk market. RNBZ deputy governor Spencer last month described the NZD as extremely and unsustainably high. While the strength of the NZD is of concern, Spencer recognised that it was in part a function of the RBNZ’s monetary tightening cycle and appeared largely resigned to the situation for now. That said, macro-prudential measures have been employed by the RBNZ in order to contain the growth of household debt, though it expects to withdraw these measures once the effect of higher interest rates makes them unnecessary."
"While the combination of macro-prudential measures, lower dairy prices and a tight fiscal stance should reign in growth potential in New Zealand further rate rises remain on the cards this year, and we continue to expect the NZD to perform well. Insofar as the BoJ may ease further in the wake of this month’s consumption tax hike, we would favour buying NZD/JPY. We look for a move towards 92.00 on a 6 mth view."
Key Quotes
"NZD/USD dropped sharply overnight with the trigger from the move being the slump in Fonterra’s milk auction prices. The Global Daily Trade index dropped a whopping 8.9%, the biggest drop in a year and the fourth consecutive fall at the fortnightly auctions. The index is now down 17% y/y reflecting unseasonably high levels of wholemilk powder volumes in New Zealand as well an uptick in supply from Australia and the US and a reported easing of demand from China."
"In September 2013 the RBNZ warned that the strength of the housing market was having a knock on effect on inflation and in doing so it set the groundwork for last month’s 25 bps rate hike. Further rate hikes are anticipated by the market and this is another factor behind the recent strength of the NZD.
"Yesterday the IMF reported that the NZD was around 5-15% overvalued. The danger is that currency strength will crowd out other non-dairy exporters and potentially even reduce NZ’s dominance of the milk market. RNBZ deputy governor Spencer last month described the NZD as extremely and unsustainably high. While the strength of the NZD is of concern, Spencer recognised that it was in part a function of the RBNZ’s monetary tightening cycle and appeared largely resigned to the situation for now. That said, macro-prudential measures have been employed by the RBNZ in order to contain the growth of household debt, though it expects to withdraw these measures once the effect of higher interest rates makes them unnecessary."
"While the combination of macro-prudential measures, lower dairy prices and a tight fiscal stance should reign in growth potential in New Zealand further rate rises remain on the cards this year, and we continue to expect the NZD to perform well. Insofar as the BoJ may ease further in the wake of this month’s consumption tax hike, we would favour buying NZD/JPY. We look for a move towards 92.00 on a 6 mth view."