New Zealand Economy Shakes Off Post-election Jitters but Kiwi Dollar Still Faces Headwinds in 2018 Say BNZ

New Zealand's economy faces a choppy few quarters but will ultimately shake off its post-election jitters. However, the same cannot be said for the Kiwi Dollar. 

New Zealand’s economy should continue to shake off its post-election jitters over the year ahead, according to economists at Bank of New Zealand, although the Kiwi Dollar will face continued headwinds in 2018.

In spite of the headlines coming out of New Zealand in the wake of September’s election, the economic fallout resulting from the change of government and its protectionist stance has been limited to a decline in business confidence thus far.

During the year ahead, the economy will be be supported by a buoyant global backdrop, which should feed a gradual recovery in Kiwi inflation.

“In spite of all that has changed, and is changing, we haven’t really altered our forecasts of the NZ economy," says Craig Ebert, a senior economist at BNZ, a division of National Australia Bank.

Markets took fright, and flight from the Kiwi Dollar, when kingmakers New Zealand First shunned the previous National Party government in favour of a coalition with the Labour Party following September’s election, which returned a hung parliament.

Fears were that Labour’s pledges to reform the RBNZ, ban foreign investors from buying residential property in New Zealand and make steep cuts to net migration would harm the economy and undermine the argument for higher interest rates.

With Labour moving swiftly to shut foreign buyers out of the NZ property market, there could be no mistaking that the new government was serious about following through on its pledges, leading the New Zealand Dollar to fall more than 6% against the greenback between October and the beginning of December.

"The new government’s policies will probably affect the composition of growth more than its overall rate, while “supporting” inflation from the bottom up,” Ebert adds.

Since early December, the Kiwi currency has begun to win back lost ground from its rivals, reversing almost all of the loss against the US Dollar and some of its decline against the Pound and other currencies.

A “short-squeeze”, where speculators walk away from bearish bets against a currency, is thought to have been behind the move.

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

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“Investors appear optimistic about the economic outlook ahead, with indicators pointing to the best global growth conditions in more than six years, supporting commodity currencies like the NZD,” Ebert notes.

Steady growth and a robust global backdrop might be enough to see the Reserve Bank of New Zealand begin raising interest rates this year which, in theory, should have positive implications for the Kiwi currency.

“However, there will probably be some near-term chop to get through. Specifically, we think the NZ economy, ran a bit slow late last year and will continue to do so in the March quarter of this year.”

The BNZ team predict that the RBNZ will move faster than the current pricing of interest rate derivatives markets implies, with its first interest rate hike set to come in August, against market expectations for an initial rate hike in November.

By the end of 2019, the New Zealand cash rate is also likely to sit much higher than the market currently projects, with Ebert and his team forecasting a 3% cash rate against a consensus forecast of a 2.5% cash rate.

“Our fundamental view on the NZD hasn’t changed. From the current level the balance of risk is skewed to the downside for the NZD, notwithstanding the possibility of a further near-term short squeeze,” Ebert warns, in a recent briefing.

Monday saw the NZD/USD rate marked back at 0.7300 for the first time since September 22, although it still has a way to go against the Euro and Sterling before it will have closed the post-election gap and the BNZ team now see it running out of steam.

“Technical indicators put the first area of resistance at 0.7370 while the relative strength indicator already suggests that the NZD is well into overbought territory. Our view is that the NZD recovery is likely to soon run out of steam,” Ebert writes.

Above: NZD/USD rate shown at daily intervals.

“Our fundamental view on the NZD hasn’t changed. From the current level the balance of risk is skewed to the downside for the NZD, notwithstanding the possibility of a further near-term short squeeze.”

The BNZ economics team flag that slowing momentum behind the global economic upswing and rising interest rates elsewhere in the world both look set to pose a challenge to the New Zealand Dollar.

“On the global scene we’ll be interested in whether the Bank of Canada hikes rates for the third time this cycle,” Ebert writes.

“Ultimately we see the global policy rate environment as negative for the NZD to the extent that rising global rates dent the outlook for global growth and risk appetite.“

The Bank of Canada is widely expected to raise interest rates Wednesday for the third time in the last year. It isn’t alone.

The Federal Reserve and Bank of England have both also raised interest rates in recent months while the European Central Bank is moving slowly to wind down its crisis era quantitative easing program.

“Last Friday we saw renewed strength in EUR and GBP resulting in these NZD crosses falling 1.5% on the day. For the year ahead EUR and GBP are our preferred currencies,” Ebert writes.

“This sees these NZD crosses fall through the year, with mid-year targets of EUR 0.56 and GBP 0.48.”

BNZ's New Zealand Dollar forecasts put the Pound-to-New-Zealand-Dollar rate at 2.0830 (+9.7%) by the end of 2018, up 9.7% from its January level. The Euro-to-New-Zealand-Dollar rate should rise to 1.7857, up 6.1% from its January level. 

Readers can learn more about what analysts and strategists say is in store for the New Zealand Dollar in 2018 here; Compilation of Major Bank Forecasts, Currency Views for 2018.

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Get up to 5% more foreign exchange by using a specialist provider to get closer to the real market rate and avoid the gaping spreads charged by your bank when providing currency. Learn more here.