New Zealand Dollar: China Stimulus and Domestic Current Account Data Disappoint

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The New Zealand Dollar is the worst-performing of the major currencies in the midweek session following disappointing current account data and news from China that no major stimulus measures were imminent.

The annual Communist Party conference is underway, and investors are looking for fresh announcements aimed at stimulating the economy, which would, in turn, boost trading partners such as New Zealand.

ING's FX strategist Francesco Pesole says the Chinese government set industrial policy as a top priority for next year, slightly sidelining the boost to domestic demand that some investors were counting on to stimulate the struggling Chinese economy.

"That confirms our expectations that China-related sentiment will not recover rapidly and that risks persist," says Pesole, a development which would prove unsupportive of the New Zealand Dollar outlook.

Following the lifting of all Covid restrictions, the Chinese economic rebound has disappointed in 2023, in turn weighing on China proxies such as the New Zealand Dollar.

Above: NZD performance relative to other G10s on Dec. 13.

The Pound to New Zealand Dollar exchange rate is 0.44% higher on the day at 2.0568, but losses for the Kiwi were more significant elsewhere; the Euro to New Zealand Dollar exchange rate was up 0.60% at 1.7705.

Against the U.S. Dollar, a loss of 0.70% was registered as NZDUSD tested 0.6092.

"Bad news for the higher beta G10 currencies today with China’s Annual Economic Work Conference disappointing markets given there was no indication of any particular focus on strong stimulus support which has dented China growth expectations," says Derek Halpenny, Head of Research for Global Markets at MUFG, in a research note covering NZD.

Earlier, New Zealand reported an annual current account deficit that came in at 7.6% of GDP in the third quarter, unchanged from the second quarter, which was revised wider from 7.5%.

The deficit confirms New Zealand imports continue to outweigh export earnings, leaving the New Zealand Dollar reliant on the inflow of foreign investor capital to maintain value.

The risk is that when capital inflows dry up - as is usually the case during global downturns and deteriorating investor sentiment - the New Zealand Dollar is left vulnerable to declines.

Above: The annual current account deficit of New Zealand contrasts to the surplus of Australia.

"New Zealand’s external position is still far too out of balance to call it sustainable," says Miles Workman, Senior Economist at ANZ.

Workman says fiscal consolidation and tight monetary conditions should help fix that in time, but until it does New Zealand remains vulnerable to a wide range of possible shocks.

"New Zealand has a potentially lengthy path towards macroeconomic sustainability to walk," says Workman. "Higher interest rates owing to a widening risk premium to access foreign capital and a lower NZD may well prove to be necessary parts of that transition."