New Zealand Dollar seen Benefiting as RBNZ Shifts Lending Conditions, but Longer-Term Weakness Expected

The Reserve Bank of New Zealand has relaxed mortgage lending conditions and this should help NZD, but only in the short-term we are told. 

The New Zealand Dollar remains oversold and prone to a bounce in the short-term, according to strategists, although some think investors should take this as an opportunity to bet on longer-term weakness in the Kiwi currency.

New Zealand’s currency rose during mid-week trade as markets responded to the Reserve Bank of New Zealand relaxing mortgage lending restrictions, delivering a boost to the NZ housing market amid uncertainty over the impact of coalition government policies.

“This follows encouragement by former PM Bill English, who earlier in the year called for the central bank to review under what conditions some of the LVR restrictions should be dialled back,” says Hans Redeker, head of G10 FX strategy at Morgan Stanley.

Banks will now be able to modestly increase the amount of high loan-to-value mortgages held on their books, according to the latest RBNZ financial stability report, which saw the central bank sound an upbeat tone on the economy overall - but note a softening in the NZ housing market during recent months.

“Easing NZ macroprudential measures should allow the NZD to outperform in the near-term, but other worries concerning the NZD such as the degree of central bank reform and the economy's declining growth potential stay in place, suggesting to us selling NZD on rallies,” adds Redeker.

The RBNZ’s softening hand comes against a backdrop of economic uncertainty thrown up by an interventionist and increasingly protectionist government.

“NZD/USD made a three-year low at 0.6780 last week, the ensuing bounce looking likely to extend to at least 0.6980 (the early Nov high). NZD/USD is undervalued, and speculators are very short NZD,” says Imre Speizer, a foreign exchange strategist at Westpac.

Above: NZD/USD rate shown at daily intervals.

Markets had feared a Labour-led coalition emerging victorious from September's election given pledges to reform the Reserve Bank of New Zealand, ban the foreign acquisition of residential property and cut net migration into New Zealand by as much as 40%, all things which economists say could hinder growth over the long term.

Domestic politics pushed the New Zealand Dollar down by more than 6% against the US Dollar in the two months to the end of November and, but recent data on the currency market suggests traders are starting to bet on a recovery.

“Positioning is now clearly supporting the NZD as some post-election short positions are liable to be squeezed out," writes Kit Juckes, chief foreign exchange strategist at Société Générale, in a note Tuesday having observed the latest data from the CFTC. “Keep long NZD/USD to trade the Dollar pullback, still looking for 0.6950 to take profit.”

Investment banks are also reporting their order books are seeing more positive bets on the NZ Dollar emerge.

“NZD long positioning has risen over the past week, in our view this is perhaps a reflection of investors buying on dips with domestic political risks having faded, modestly,” says Valentin Marinov, head of G10 FX strategy at Crédit Agricole, in a recent note.

The NZD/USD rate was quoted 0.14% higher at 0.6905 during morning trading Wednesday, although the Pound-to-New-Zealand Dollar rate was marked 0.15% higher at 1.9394.

All of that said, protectionism by the government could mean concerns over the outlook for foreign direct investment, as well as the economy’s long term growth potential, remain elevated in the medium term.

Above: Pound-to-New-Zealand-Dollar rate shown at daily intervals.

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Protectionism to Weigh on NZD in Medium-term

The coalition said Wednesday it will put forward legislation by the end of the year, in time for it to take effect some time in the first quarter of 2018, that bans overseas investors from buying existing residential property in New Zealand. It also moved to tighten restrictions on the overseas acquisition of farmland.

“Too often we see investors buy a New Zealand farm, and then use existing systems, technology and management practices which don’t substantially add anything new, or create additional value to our economy,” David Parker, an associate finance minister, said in Wednesday’s announcement.

The Labour led coalition has issued a new Directive Letter to the Overseas Investment Office which drastically reduces the amount of farmland overseas investors are able to purchase without approval by authorities.

“We want to make it clear that it is a privilege to own or control New Zealand’s sensitive assets, and this privilege must be earned. We campaigned on these changes and they won’t come as a surprise to potential investors,” Parker adds.

The old threshold from which land acquisitions must be approved by the government meant only farms ten times the size of the average New Zealand farm were subject to the rule.

Labour’s new 5 hectare threshold is closer to the average and so will mean a substantially larger number of land acquisitions require government approval.

With foreign direct investment to one side, high levels of indebtedness and uncertainty over the inflation outlook are also seen posing challenges to the New Zealand Dollar over the medium-longer term. 

"The financial stability reports highlight the need for balance sheet consolidation which will ultimately push net wealth lower and local savings higher. The anticipated shift towards higher local savings relative to local investment could push these economies' currencies lower," says Redeker, referring to the NZD, Canadian Dollar and Norwegian Krone.

None of this bodes well for the interest rate outlook in New Zealand.

Interest Rate Outlook Clouded

The RBNZ has kept the cash rate at 1.75% since late 2015 and few strategists see it moving any time soon. 

"We are always somewhat reluctant to draw strong conclusions for the OCR outlook from this document. But OCR hikes still look some way away," says Phil Borkin, a senior economist at ANZ Research. 

The outlook for interest rates in NZ is more clouded than elsewhere at present. Not only is economic uncertainty high and the central bank under the watch of an acting governor, who is the sole rate setter, the coalition government is also in the process of reviewing the RBNZ's mandate.

A review, commissioned by Finance Minister Grant Robertson, is looking at whether an obligation to foster full employment can be incorporated alongside the RBNZ inflation target. 

A hard unemployment target has already been eschewed, although the review is seen as likely to recommend a shift away from the current rate setting model, where the cash rate is determined by the governor alone, to a committee setting model.

It is also seen as likely there will be a recommendation for the bank to target full employment, wherever that may be, as well as inflation - which mean New Zealand interest rate and Dollar forecasts will be all the more difficult for the foreseeable future. 

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