New Zealand Dollar Lifted by Trade Surplus and a Credit Check
The New Zealand Dollar has risen after a surge in exports and a brighter economic outlook.
NZD spiked higher against both the US Dollar and the Pound following the release of trade data on Tuesday, Janaury 30 which showed a surprisingly high trade surplus which was the highest surplus on record for December.
This was followed by a positive assessment of the New Zealand economy's credit rating by rating agency Standard & Poor, which appeared to endorse a rosier outlook for the economy which is expected to rub off on the currency.
The reaction by the NZ Dollar was clear:
Trade Surplus Rises
The difference between imports and exports entered surplus territory in December 2017 registering a 640 million (m) surplus. The consensus amongst economists prior to the release had been for a more muted 125m rise.
This compared to a -1m deficit in December 2016.
Both exports (+25.7 percent year-on-year) and imports (+11.2 percent) reached new highs.
The rise in exports was driven by New Zealand dairy products, as would be expected given they are the country's premier export, which rose by 30.3%.
This offset lower growth in meat and logs but was supported by higher growth in oil, aluminum and fruit exports - with the former two supported, no doubt, by recent price rises.
Interestingly, dairy products are not historically speaking particularly expensive at the moment, after a year of mainly price declines.
However, the trade data shows that this was offset by the higher volumes exported, in terms of the impact these exports had on the trade balance.
The growth in volume despite lower prices is a theme which analysts at Swiss lender UBS have touched on in relation to the Australian Dollar, which they see rising, due to high volumes of iron ore being exported despite the risk of falling prices.
The chart below shows the price of Whole Milk Powder, and whilst it has risen sharply at the most recent auction, the dominant downtrend indicates it remains quite low compared to historical price norms.
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Rising volume more than price could support the Kiwi in the future if December's trade data is a taste of what's to come, and UBS's analysis of the Australian trade dynamics can be applied to its neighbour.
Indeed, if volumes continue to rise this will also likely raise commodity prices as well in the future since the two are linked by supply and demand.
New Zealand Economy Gets Thumbs Up
Sentiment towards the New Zealand Dollar was raised after credit rating agency S&P gave the New Zealand economy a clean bill of health on Tuesday after it reaffirmed its AA/A-1+ rating and 'stable' outlook.
This may offset some of the fear factor associated with the new government's foreign policies - which had caused the Kiwi to weaken significantly both before and after the elections in 2017, as the coalition proposed rules forbidding foreign ownership of property and enterprise.
The S&P's assessment was broadly positive about the new government's budget in December, in which it proposed an increase in welfare and family benefits paid for by scrapping tax cuts about to be implemented by the previous administration.
“This decision (to leave NZ's credit rating unchanged) effectively gives a tick to the policy agenda outlined in the Government’s Budget Policy Statement (BPS) in December,” says New Zealand Finance Minister Grant Robertson.
The rating decision appears to endorse the new government's growth-orientated policy strategy which will probably help support the Kiwi in the long run as it is likely to drive up inflation and make the Reserve Bank of New Zealand (RBNZ) raise interest rates.
Higher interest rates tend to drive up currencies by increasing foreign capital inflows, due to the draw of potentially higher returns.
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