New Zealand Dollar Clobbered by Lower Inflation but Weak USD Puts Brake on Losses

Kiwi interest rates and inflation are back at the top of the agenda for the New Zealand Dollar this Thursday, leaving politics in the shade for the time being.  

The New Zealand Dollar was dealt a blow heading into the Thursday session after Kiwi inflation was shown posting a surprise fall in the fourth quarter.

Headline consumer price inflation rose by just 0.1% in the final quarter of 2017, when compared with the third quarter, while markets had been looking for a 0.4% increase.

This brought the annual inflation rate down to 1.6% from 1.9% previously, according to Statistics New Zealand data, when the market had been expecting it to hold steady at 1.9%.

The result puts inflation below the Reserve Bank of New Zealand’s 1.8% forecasts for the year and a long way off from the top end of the RBNZ's 1% - 3% inflation target.

“The downside surprise was largely in the tradables component. Tradables prices fell by 0.3% and the decline was widespread – virtually every category with imported content came in below our forecasts,” says Michael Gordon, a senior economist at Westpac.

New Zealand’s Dollar dropped by more than 100 points against the US Dollar in response, falling from 0.7429 to 0.7326, before paring some of its loss.

“The market still prices in 20bp of hikes by year end and inflation is an important component for the RBNZ,” says Hans Redeker, head of FX strategy at Morgan Stanley, in a note to clients.

“As such, the weakness seen in 4Q inflation should see the RBNZ on-hold over 1H18, possibly with an added emphasis on the need for a weaker currency.”

The Reserve Bank of New Zealand has held the cash rate at 1.75% since late 2016 and has not been expected to begin lifting the rate until early around the turn of the year, or some time in early 2019, according to pricing in interest rate derivatives markets.

Thursday’s weaker than expected inflation figures risk seeing markets give up hope of an interest rate rise later this year, which would be bad for the New Zealand Dollar, particularly as consumer price pressures are now weaker than the Reserve Bank had expected them to be.

“With a backdrop of a maturing global growth cycle and with risk assets reaching new extremes, we reiterate that the NZD belongs to a selection of G10 currencies that we believe are highly exposed to a weakening of risk sentiment,higher funding costs and risks of a deterioration of local housing markets - our "canaries in the coal mine",” Redeker writes.

Morgan Stanley flags the extreme weakness of the US Dollar as something that has put a break on further losses for the New Zealand Dollar however, the strategy team is sticking with its call that the Kiwi currency is one of the clear cut losers from the current global growth boom.

The New Zealand Dollar was quoted 0.29% higher at 0.7359 against the US Dollar during late morning trading Thursday while the Pound-to-New-Zealand-Dollar rate was marked 0.06% higher at 1.9390.

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.

Above: NZD/USD rate shown at daily intervals.

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Kiwi Shruggs Off TPP Trade Success

The New Zealand Dollar shrugged off a double-whammy of currency positive political developments Wednesday, settling for a chequered performance against the G10 basket ahead of the fourth-quarter NZ inflation reading.

New Zealand’s government said Wednesday that it has achieved its five objectives in the renewed negotiations over the Tran Pacific Partnership, which has now been renamed as the Comprehensive and Progressive Agreement for the Trans-Pacific Partnership.

Agreements satisfying the Labour government's concerns with the deal, including on a revised and less potent investor to state dispute resolution mechanism, now clear the way for the accord to be signed (in March) and implemented later in 2018.

“Before the agreement is ratified, New Zealanders will be given the opportunity to better understand what it means for them, their families and the country. We are committed to ensuring this is done in a fair and accessible way,” says David Parker, the NZ trade minister, in a statement to the media.

A consequence of the new deal on TPP is that the New Zealand government now has more time to get to contemplate a controversial push to shut foreign buyers out of the NZ property market.

Legislation had been expected to be in place by March but trade minister David Parker said Wednesday the government will now take longer to consider the issues.

“The Government will now recommend the select committee examining the Overseas Investment Amendment Bill – which will put in place restrictions on foreign buyers of existing homes – allow more time for consideration,” Parker says.

“The law must be in place before the CPTPP takes effect.”

Labour’s plan to ban foreign investors from buying existing residential property in New Zealand was one of several policies that led currency markets to panic when New Zealand First decided to become a junior partner in a Labour led coalition government back in October.

A now-ongoing review into the Reserve Bank of New Zealand’s mandate and plans for an aggressive clampdown on immigration also featured highly on economists’ list of concerns.

The policy platform and New Zealand First’s decision to form a government with Labour led the New Zealand Dollar to fall more than 6% against an already weak US Dollar during the final quarter of 2017.

Beyond the currency slump, actual economic fallout from the election outcome has been contained to a decline in business confidence, so far, leading the NZ currency to retake lost ground from the greenback and other currencies during recent weeks.

The New Zealand Dollar was quoted 0.72% higher at 0.7412 against the US Dollar during noon trading Wednesday while the Pound-to-New-Zealand-Dollar rate was marked 0.63% higher at 1.9154.

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.

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

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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.