The New Zealand dollar has made an excellent start to 2013 –
it was the top performing G10 currency during the first quarter. Global risk
appetite has been remarkably buoyant this year and surging dairy prices have
also reflected well on the NZD. Along with resilient market sentiment, domestic
economic performance has been a key driver of the NZD’s strength over recent
months, in an otherwise low growth global environment. The GDP number for Q4
2012 came in at an impressive 1.5% q/q, which was the fastest quarterly pace of
growth in three years, well above expectations of 0.9% and this put 2012 growth
at an impressive 2.1%.
As the recovery from the Christchurch earthquake continues, NZ
manufacturing maintained a robust pace of expansion throughout Q1, particularly
by global standards. The droughts that have troubled the country’s rural areas
in recent months look set to impact GDP negatively to some extent but we still
envisage growth of up to 3.0% in 2013, which will certainly outpace most
developed economies.
Importantly, New Zealand’s house price index reached a new record
high in March, which is a major factor that could drive the Reserve Bank of New
Zealand to raise its already attractive 2.50% interest rate later this year.
RBNZ Governor Wheeler himself has told us that if house prices stay where they
are, then his hand may be forced on a rate hike, despite below-target NZ inflation.
As things stand, the RBNZ is right at the front of the queue with respect to
G10 central bank first-movers and we are looking at a hike around the turn of
the year. The RBNZ and the NZ government’s frustrations with the strength of
the NZD should of course be monitored but it really does seem as though both
institutions are resigned to a strong currency for the foreseeable future.
The stuttering global economic recovery doesn’t exactly
point to huge demand for a riskier commodity currency like the NZD. However, a
look at the monetary policies of the US Federal Reserve and the Bank of Japan
provides some explanation as to why risk appetite has been so durable this year.
The huge liquidity being pumped into the financial markets by the Fed and the
BoJ’s quantitative easing programmes has provided ongoing encouragement to
market players to search for the higher yield of currencies like the NZD. Recent
US data suggests that the Fed will continue with QE3 well into the second half
of this year, while the BoJ has barely got started. As a result of this and NZ’s
robust economic fundamentals, there has been a notable surge in foreign demand
for NZ bonds, which is indicative of the fact that NZ represents a rare bright
spot in the global economy.
Whilst most signposts point to NZD-strength this year, we
fully expect periodic bouts of risk aversion to dampen the NZD’s performance at
various points this year. Uncertainties remain with respect to the US, European
and Chinese growth outlooks, whilst we are very wary of further debt crisis
sagas in the eurozone. Nonetheless, we fully expect sentiment towards the NZD
to remain positive during 2013, with these risk-off periods likely to provide investors
with attractive opportunities to buy NZD on dips.
As far as the UK economy and sterling is concerned, the
picture looks distinctly gloomy when compared to conditions in NZ. We expect a
triple-dip recession will be narrowly avoided with a 0.1% Q1 figure next week but
we doubt that UK growth will do little more than flat line this year, perhaps
posting growth of around 0.5%. Accordingly, we fully expect the Bank of England
to provide further support to the recovery in the form of more quantitative
easing (along with other more unconventional monetary easing measures),
possibly as soon as May. Sterling’s share of safe-haven flows has diminished considerably
amid the loss of its AAA credit-rating and the government’s failure to make
inroads on the UK debt profile.
This pair is posting fresh all-time lows almost on a monthly
basis and we do not see it bottoming out just yet - the NZ picture is bright
and the UK economy is failing to turn a corner. It will not be a straight line south
but shelf-life above 1.80 certainly looks limited. A period of consolidation at
current levels may continue for the next few months and beyond this we note
prominent risks of a push down to the 1.70-1.75 area.
Richard Driver
Analyst – Caxton FX
Analyst – Caxton FX
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