Natural Disaster Insurance Flows Could Support New Zealand Dollar says CBA

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The New Zealand Dollar remained the clear underperformer among major currencies for the recent week and month on Tuesday but Commonwealth Bank of Australia analysis suggests settlement of the insurance bill for February's natural disasters could be marginally supportive of the Kiwi up ahead.

Recent underperformance followed severe flooding in early February with damage and loss of life compounded by the arrival of Cyclone Gabrielle.

But Commonwealth Bank of Australia analysis suggests eventual settlement of insurance claims could offer the currency a degree of support.

"Reinsurers are typically based in Europe. Foreign capital will flow into New Zealand later this year as claims are settled. The capital inflows may support NZD. But the boost to NZD is unlikely to be large," says Joseph Capurso, head of international economics at Commonwealth Bank of Australia. 

"NZD/USD lifted from around 0.70 at around the time of the Canterbury earthquakes to over 0.80 in 2012‑2014. That significant increase in NZD/USD is loosely correlated with capital flows into New Zealand associated settled insurance claims," Capurso writes in a Tuesday research briefing.

Source: Commonwealth Bank of Australia.

New Zealand's Dollar rose by almost 15% against the U.S. Dollar in the two years covering the earthquake and aftershocks impacting Christchurch, New Zealand and Canterbury Plains from September 2010 to December 2011, although there were also other factors driving Kiwi exchange rates at that time.

There were some 185 fatalities and around 10,000 buildings were estimated to have been completely destroyed over that period.

"NZD/USD followed interest rate differentials with the US in 2011 and 2012 (chart 5). Reinsurance‑related capital inflows probably played some part supporting NZD during that period. However, we note AUD/USD increased strongly during that period too," Capurso says.

"Global factors played a part in supporting AUD and NZD during that period. The period was characterised by China’s very large fiscal stimulus in the aftermath of the global financial crisis that spilled over to the rest of the world," he adds.

Source: Commonwealth Bank of Australia. 

Capurso and the CBA team note that average turnover in the NZD/USD exchange rate was equal to $NZ29bn per day last year and that at their peak, capital inflows to New Zealand resulting from insurance payouts were a mere $NZ1.5bn per quarter.

It's thought that damage resulting from this year's flooding and Cyclone Gabrielle is of a lesser scale than that caused by the earthquakes, meaning the cost of insurance and the size of any related capital flows are both likely to be smaller this around. 

As of European Tuesday, there were 11 fatalities and at least 1,100 people recorded as missing, hence why the government extended on Monday a state of national emergency that was initially declared on February 14.

"Making a claim following a natural disaster will become easier after the Natural Hazards Insurance Bill passed its third and final reading in Parliament today," says Dr Deborah Russell, Minister for the Earthquake Commission (EQC).

"This Government is improving the Earthquake Commission scheme, so in future New Zealanders don’t have to go through the same traumatic experiences as the people of Canterbury," she adds in a statement on Tuesday.