Market Insight – Foreign Exchange – Kiwi strength to fade on further easing

Optimistic Wheeler supports NZD

Last week Reserve Bank of New Zealand (RBNZ) governor, Graeme Wheeler, struck a surprisingly optimistic tone at the bank’s monetary policy meeting, holding off on any further rate cuts and painting a far better picture of the global economy and the domestic inflationary outlook than three months ago. The improved tone of the meeting and decision to maintain the status quo boosted the NZD on the day and contributed to a wider 3.8% rally experienced since the start of June (on a trade weighted basis). Recent NZD strength can be attributed to the relatively high interest rate that New Zealand offers when compared with developed market counterparts, as foreign central banks maintain ultra-loose monetary policy measures in the face of subdued inflationary pressures. Currency strength has potential to neutralise the impact of low interest rates on improvements in domestic inflation which could force the RBNZ to pursue a more aggressive easing path than currently assumed.

Risks to RBNZ projections

In its second monetary policy statement of the year, the RBNZ presented a risk scenario in which a stronger NZD weighs on inflation by making imports cheaper and consumers more prone to switching away from domestically produced goods and services to imports. In such an event, the RBNZ assumes that more aggressive cuts to interest rates will be needed to ensure inflation settles around the 2% level in the medium term. This risk may already be in play, with the current trade weighted level of the NZD 3.9% higher than assumed the RBNZ’s scenario analysis (see Figure 1). Should recent NZD strength be reflected in weak Q2 inflation data scheduled for release on the 17th July, then the NZD may come under pressure against the US Dollar, where core inflationary pressures and rate prospects are improving.

NZD/USD to face resistance

The NZD/USD exchange rate is trading at the highest levels for the past twelve months, but has struggled to sustain an increase beyond the 0.71 level that it reached on the day of the RBNZ meeting (9th June). Going forward, should the NZD/USD test this level again there is potential for it to run into some resistance.

*All figures quoted are sourced from Bloomberg unless stated otherwise.

Important Information

This communication has been issued and approved for the purpose of section 21 of the Financial Services and Markets Act 2000 by ETF Securities (UK) Limited (“ETFS UK”) which is authorised and regulated by the United Kingdom Financial Conduct Authority (the “FCA”).

The information contained in this communication is for your general information only and is neither an offer for sale nor a solicitation of an offer to buy securities. This communication should not be used as the basis for any investment decision. Historical performance is not an indication of future performance and any investments may go down in value.

This document is not, and under no circumstances is to be construed as, an advertisement or any other step in furtherance of a public offering of shares or securities in the United States or any province or territory thereof. Neither this document nor any copy hereof should be taken, transmitted or distributed (directly or indirectly) into the United States.

This communication may contain independent market commentary prepared by ETFS UK based on publicly available information. Although ETFS UK endeavours to ensure the accuracy of the content in this communication, ETFS UK does not warrant or guarantee its accuracy or correctness. Any third party data providers used to source the information in this communication make no warranties or representation of any kind relating to such data. Where ETFS UK has expressed its own opinions related to product or market activity, these views may change. Neither ETFS UK, nor any affiliate, nor any of their respective officers, directors, partners, or employees accepts any liability whatsoever for any direct or consequential loss arising from any use of this publication or its contents.

ETFS UK is required by the FCA to clarify that it is not acting for you in any way in relation to the investment or investment activity to which this communication relates. In particular, ETFS UK will not provide any investment services to you and or advise you on the merits of, or make any recommendation to you in relation to, the terms of any transaction. No representative of ETFS UK is authorised to behave in any way which would lead you to believe otherwise. ETFS UK is not, therefore, responsible for providing you with the protections afforded to its clients and you should seek your own independent legal, investment and tax or other advice as you see fit.