New Zealand Dollar to Pressure Aussie Rival and Pound say Deutsche Bank: Sell GBP/NZD

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Betting on a fall in the Pound-to-New Zealand Dollar exchange rate makes more sense argue Deutsche Bank. 

The New Zealand Dollar slipped lower Friday as global factors took precedence over a better-than-expected domestic retail sales report: GBP/NZD was quoted 0.5% lower at 1.9157, the NZD/USD was quoted at 0.7295 and EUR/NZD at  1.6878.

The Kiwi currency is however tipped to keep its Australian and British rivals under pressure and advance in the months ahead argue currency strategists at Deutsche Bank.

Indeed, Thursday’s retail sales data provided another sign the New Zealand economy is taking last year’s change of government in its stride, with consumer spending having risen by 1.7% during the fourth quarter when markets had expected only a 1.4% increase.

Better than expected consumer spending comes just months ahead of a planned rise in the minimum wage, which will see low earners pay packets boosted by nearly 5% from April this year. Thursday’s report also augurs well for fourth quarter GDP data due in March.

“NZD has come a long way, posting the strongest performance of all G10 currencies since the new government took control. The market was concerned that new policies could affect growth, but seems to have gravitated to our view that disruption would be minimal,” says Tim Baker, an FX strategist at Deutsche Bank.

The New Zealand Dollar came under severe pressure in late 2017, dropping more than 6% against an extremely weak US Dollar, as markets took fright at New Zealand First’s decision to form a coalition government with the Labour Party. But it has bounced back strongly since mid-December.

“Of course, USD weakness has been a contributor – NZD hasn’t risen much against some currencies. But NZD has done very well against AUD also. Our Blueprint trade to sell AUD/NZD has worked, with the cross having now fallen through our mid-year forecast of 1.07,” says Baker.

Proposals of reform for the RBNZ, a ban on the foreign acquisition of existing residential property and a crackdown on migration were at the heart of initial market concerns. But while the Labour government has pushed ahead on almost all of these fronts, the economic fallout thus far has been limited to a decline in business confidence.

“As today’s retail sales data show, NZ consumers are in good shape, in contrast to Australia where consumer sentiment is the worst in G10. And next week brings the return of the closely watched ANZ business survey, which may follow the PMI and rebound from low levels,” Baker adds.

Baker and the Deutsche Bank team have been selling the AUD/NZD rate in 2018 and, after a -2.58% fall in the exchange rate during the first six weeks of the year, are taking profits off of the table. However, they still see the exchange rate remaining under pressure in 2018 for a number of reasons.

Above: AUD/NZD rate shown at weekly intervals.

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“We still think the RBNZ hikes before the RBA, contrary to market pricing which has them moving together. But AUD/NZD is already ‘in-line’ with a rates re-pricing of 25bps,” says Baker.

“Similarly, AUD/NZD has largely closed the relative commodity price gap. We’re not keen on buying the cross though, given NZ’s solid fundamentals.”

Another factor likely to pressure the AUD/NZD rate is the gap between wages and employment levels in New Zealand and Australia.

Australia saw a strong jobs rally in 2017, which helped lift sentiment toward the Dollar, although the unemployment rate sits at only a four and a half year low while wage growth has been disappointing for markets and the Reserve Bank of Australia.

Without a pickup in wage growth, inflation is likely to remain lacklustre, keeping the RBA on the sidelines while other central banks raise interest rates, with adverse implications for the Aussie Dollar.

Conversely, New Zealand unemployment fell to its lowest level since the financial crisis in February and wages are growing at a healthy clip. They are sure to grow further over the quarters ahead too, given the government plans to push the minimum wage higher.

The New Zealand minimum wage will rise nearly 5% in 2018, to $16.50 an hour, up from $15.75 in the current year. Further increases, taking it all the way up to $20, are pencilled in for the years to the end of 2021.

This could see New Zealand inflation rising faster in the quarters ahead, which might be enough to tempt the Reserve Bank of New Zealand off of the sidelines and into an interest rate hike.

“Relative wages and employment both say AUD/NZD should stay comfortably below 1.10,” Baker notes.

A New Zealand interest rate hike at any time in the near future would be sure to lift the Kiwi Dollar as pricing in interest rate derivatives markets, which enable investors to protect themselves against changes in interest rates, suggests traders do not currently anticipate a rate rise before May 2019.

“An alternative way to express NZD strength is to sell GBP/NZD, which also plays to our team’s bearish GBP view. The countries face some similarities - very tight labour markets, and concerns around a supply shock as population growth fades. Yet the central banks take divergent views,” says Baker.

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

While the Reserve Bank of New Zealand is content to stay on the sidelines for the time being, keeping the Kiwi cash rate at a record low of 1.75%, the Bank of England has begun to raise interest rates.

Markets have responded to the BoE in kind by pushing the Pound Sterling higher against most of its international rivals in the months since the BoE’s first hike in November.

Sterling has risen by 5% against the US Dollar in the last three months, by 1.1% against the Euro, 2.45% against the Australian Dollar and is down -0.88% against the New Zealand Dollar. Deutsche Bank says the Kiwi can continue to pressure the Pound during the months ahead.

“The hawkish BoE worries about inflation despite inflation peaking as GBP weakness has faded, softer consumer demand and Brexit risk. In contrast the RBNZ is dovish – they don’t expect to hike until mid-2019,” Baker writes, in a note Friday.

"That’s despite the above-mentioned robust consumer and the 4¾% minimum wage hike coming in April. We expect to see some convergence in thinking from these central banks."

Rising dairy dairy prices have also boosted the value of New Zealand exports of late, improving its so called "terms of trade", while positioning of traders is yet to catch up with the evolving New Zealand economic picture. Both of these factors point to further downside for the Pound-to-Kiwi rate, according to Baker.

The NZD/USD rate was quoted 0.22% lower at 0.7304 and the AUD/NZD rate was 0.01% higher at 1.0705 during early trading in London Friday.

Sterling was quoted 0.46% higher against the Kiwi, making for a Pound-to-New-Zealand-Dollar rate of 1.9140.

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