Caution on New Zealand Dollar Warranted as Wheeler Parts with Warning Shot on Currency

With Wheeler having used his last speech to flag a strong Kiwi dollar as an impediment to RBNZ policy, traders are understandably cautious on NZD.

The New Zealand Dollar could be set for an extended period of weakness relative to many of its G10 rivals after Reserve Bank of New Zealand chief, Graeme Wheeler, used one of his final speeches to flag the increase in the trade-weighted exchange rate as an impediment to the bank's monetary policy objectives before attempting to jawbone it lower.

The outgoing central banker, whose term ends in September, focused heavily on the Kiwi currency in a prepared speech at the Northern Club, flagging its stubborn strength during his four and a half years at the helm of RBNZ.

“Looking at the key relative prices in the economy we would have preferred a lower exchange rate over this period,” Wheeler noted. “The Trade Weighted Index remains 4% higher than it was prior to the seven cuts in the Official Cash Rate that commenced in June 2015.”

New Zealand, largely a commodity-reliant economy, cut its benchmark interest rate from 3.5% in June 2015, by 25 basis point increments, to 1.75% by November 2016 in response to the commodity price rout that began sweeping across the globe in late 2012.

“The appreciation in the exchange rate has been a headwind for the tradables sector and, by reducing already weak tradables inflation, made it more difficult to reach the Bank’s inflation goals,” Wheeler added. “A lower New Zealand dollar is needed to increase tradables inflation and help deliver more balanced growth.”

The Kiwi dollar fell against all of its G10 rivals Wednesday, particularly when stood next to the pound sterling and US dollar.

The New Zealand dollar to US dollar exchange rate fell by 0.56% during the London session, with bids and offers accepted around 0.7217, while the New Zealand dollar to British pound exchange rate slid 0.52% to 0.5591. The kiwi dollar to euro exchange rate fell 0.18% to 0.6052

“We would make the assumption that the new acting Governor Spencer has a similar outlook for the economy,” says Hans Redeker, a strategist at Morgan Stanley. "We are long EURNZD and expect AUDNZD to break above the March high of 1.1020, opening room to 1.1200."

New Zealand is less than a month away from a general election that will see the incumbent National Party, a conservative party, face off against left-of-center challengers, the Labour Party.

In the Pre-election Economic and Fiscal Update 2017 last week, finance minister Steven Joyce reduced the NZ Treasury’s forecasts for economic growth in the current year and the next, while also projecting a lesser budget surplus in the four years to June 2021.

“We remain downbeat on NZD despite the recovery in equity markets; Wheeler used his last speech to jawbone the currency a bit more, and we look to buy dips in EURNZD and AUDNZD ahead of New Zealand's elections next month,” says Mark McCormick, head of North American fx strategy at TD Securities.

The New Zealand Dollar has been the worst-performing G10 currency over the course of the past month. In fact, it is hard to find a currency anywhere that has done worse.

In the year-to-date only the US Dollar has underperformed the currency in G10.

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