New Zealand Dollar Eyes Boost from Wage Data this Week but Stay "Short" say ANZ

- NZD rises Monday on continued tailwind from inflation boost.

- Tuesday's wage data is expected to provide NZD a further lift.

- But gains will be short-lived as interest rate outlook remains dire.

© Naru Edom, Adobe Stock

The New Zealand Dollar rose broadly at the beginning of the new week and will continue to rise over coming days, according to strategists at Australia & New Zealand Banking Group, although a negative medium-term outlook means it is only a matter of time before the Kiwi currency is clobbered by fresh losses once again.

Second-qaurter labour market data, due late on Tuesday evening, is the main event for the Kiwi Dollar this week and with the Labour-led coalition government having implemented the first of several anticipated increases to the minimum wage in April, an improved set of wage numbers look to be a credible prospect. 

The minimum wage is set to rise from $15.75 per hour last year to $20 per hour in 2020, which will flatter average wage growth numbers each year. A sharp rise in the labour cost index Tuesday would be sure to light a fire beneath the New Zealand Dollar, even if only for a short period of time.

This is because meagre levels of wage growth have weighed so heavily on domestic inflation, Kiwi interest rates and the Dollar during recent times. However, any increase would hardly be the result of organic wage pressures so markets may find that any subsequent boost to the Kiwi fizzles out quickly. The ANZ team are betting this works out to be the case. 

"Labour market figures are expected to show a relatively tight labour market and stronger wage inflation, in large part due to minimum wage hikes. This should amplify the “When will the RBNZ hike rates?” chant and support NZD," says Daniel Been, head of FX research at ANZ. "Our medium-term views have not shifted, though, so we’d use strength to average into short positions."

The Reserve Bank of New Zealand has held its interest rate at a record low of 1.75% ever since the end of 2016, citing below-target inflation, weak wage growth and a challenging outlook for the economy. Consensus is for the central bank to keep rates here until some time in the second-half of 2019.

Kiwi inflation has remained below the midpoint of the 1% to 3% target ever since 2012, aided by the combined effects of weak wage growth and high household debt levels, which have crimped the extent to which consumers have been able to raise their spending.

This, at a time when central banks in the US, Canada, UK and elsewhere are raising their own interest rates, has incentivised investors to sell the Kiwi Dollar in favour of buying Pounds, US Dollars and other currencies.

As a result, New Zealand's Dollar has lost 5.19% against the US Dollar in 2018 and 2.99% against Pound Sterling, although it has fallen further than that in recent months, because it had risen by similar measures during the first quarter of the year.

Changes in interest rates, or hints of them being in the cards, are only made in response to movements in inflation but impact currencies because of the push and pull influence they have on international capital flows and their allure for short-term speculators.

"Domestic chatter has shifted from “Can the RBNZ cut the OCR?” to “When will the first hike be?”, which should provide some support; as should the positioning backdrop. Global considerations have also turned more positive, with US data surprises rolling over and China providing some fresh fiscal stimulus. So conditions for some NZD strength look to be building. Medium term, though, we remain bearish NZD," Bean explains. 

Inflation ticked higher by a fraction during the second quarter, with the annual consumer price index rising to 1.5% and the RBNZ's preferred measure of core consumer prices, which remove the most volatile items from the goods basket and so is seen as more representative of underlying trends in prices pressures, posted a surprise increase to 1.7%.

This delivered a tailwind to the Kiwi last week, leading analysts at ING Group to advocate betting on a short-term bounce that might take the New Zealand Dollar rise all the way to 0.69 against the US Dollar. As it happens, ANZ's financial model places "fair value" for the Kiwi Dollar at around 0.69 per US Dollar.

This is a fraction above the market price, suggesting the Kiwi unit is only modestly undervalued at current levels. Currencies frequently swing between being undervalued or overvalued and normally tend to reverse course when they reach points at which markets perceive the valuation mismatch to be at an extreme.

However, the ANZ team hold a bearish outlook for the Kiwi Dollar. They forecast that, after a brief run at 0.69 for the NZD/USD rate during the third-quarter, the Kiwi currency will then fall back to 0.67 by year-end. They predict even further losses, to 0.65, during the 2019 year. The NZD/USD rate was quoted 0.56% higher at 0.6810 Monday. 

The Pound-to-New-Zealand-Dollar rate is forecast to rise to 2.05 before the end of 2018 and to 2.20 by the time 2019 is out, according to the latest ANZ forecasts. The Pound-to-Kiwi rate was quoted 0.15% higher at 1.9270 Monday.

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