New Zealand Dollar Enjoying its Status as a Safe Haven - What Does this Tell us About the Outlook?

The New Zealand dollar (NZD) is one of the best performing currencies of recent weeks - what does the recent strength tell us about the outlook?

The NZ dollar has been steadily gaining a reputation for being a 'safe-haven' as markets are bucked by Brexit fears.

Financial markets continued to be driven by the ebb and flow of opinion polls on the UK’s EU referendum, and with the vote looming we are seeing new NZD strength.

At the time of writing the pound to New Zealand dollar is lower by 0.3% at 2.0507 and despite the pound's recent rebound, the trend remains lower.

Analysts at ANZ Research have reflected on how robust the Kiwi has been of late in the face of what have been big swings in risk appetite, interest rates and asset prices.

While ANZ join the Reserve Bank of New Zealand in acknowledging the importance of a weaker currency to the New Zealand economy, they note that for now, stability is arguably a more beneficial quality to engender.

“It’s equally crucial that we avoid a sudden stampede for the door given that two thirds of the bond market is offshore-owned, and given New Zealand’s reliance on offshore savings,” say ANZ Research in a note to clients.

The resilience of the NZD is strange when we consider the currency has traditionally suffered, alongside the other ‘commodity currencies’ when markets were running scared.

“It’s too soon to say whether that’s a permanent change, but when we consider what’s driving the NZD, and relate that back to the RBNZ’s higher TWI/more OCR cuts alternative MPS scenario, you’d have to say that the recent jump in the Kiwi has more of a ‘portfolio shift’ feel to it than a ‘real shift,’” argue ANZ.

Latest Pound / New Zealand Dollar Exchange Rates

	Live: 2.3114▼ -0.06% 12 Month Best: 2.3553
*Your Bank's Retail Rate	2.2328 - 2.242
**Independent Specialist	2.279 - 2.2883 Find out why this is a better rate

* Bank rates according to latest IMTI data.

** RationalFX dealing desk quotation.

 

NZD Allowed Higher by a Static RBNZ

Underpinning the pro-NZD sentiment of late has been a better economic data pulse.

NZ GDP and consumer confidence a touch better, but dairy prices lower.

“House prices are higher, and offshore bond holdings are up strongly, suggesting that it might be flows, rather than economics keeping the Kiwi bid,” say ANZ.

Meanwhile, US data has been mixed, but Brexit has, of course, been the big fear.

This brings into question whether or not the RBNZ will actually cut interest rates again.

Certainly, on the face of the data and the economy's resilience, further cuts are not required.

“Will the allure of NZ’s remoteness and high interest rates bring the RBNZ back to the table? The domestic economy doesn’t need cuts – we’re sure of that – but the global scene and TWI strength might need an offset,” say ANZ.

Therefore - a cut would presumably only be brought about to explicitly target a lower NZD.

However, we have seen in the past that such one-off actions rarely work and it may take more agressive policy measures to force the currency down.

The New Zealand Economy is Well Placed

While the New Zealand economy enjoys a stable footing, in the game of currencies all that matters is how much better or worse you are than your counterparts.

Consider a world of excessive leverage, elevated, asset prices, capital misallocation, China wobbles, low inflation expectations etc and we get a sense of what the issues a range of competitors are facing.

“We are mindful of the challenges and certainly not complacent or dismissive of these global issues, but our base case remains that the New Zealand economy has enough in the tank to absorb these risks,” say ANZ.

As such, in their latest foreign exchange forecast update ANZ have noted that because New Zealand enjoys has more political and economic stability than most they expect the NZD will be tough to budge from elevated levels.

But NZD Still Forecast Lower

There is however a certain contradiction embodied in ANZ’s forecasts, when compared to the tone carried in this report, as the New Zealand is seen headed lower from here.

The pound is however expected to bounce back against the NZD.

This would be predicated on the fact that ANZ, like the majority of institutional analysts, are expecting sterling to recover following a Remain win.

The pound to New Zealand dollar exchange rate is forecast to rise to 2.44 by year end, and 2.63 by mid June 2017.

Against the US dollar, NZD/USD is seen falling to 0.63 by the end of 2016, and heading lower to 0.61 by mid 2017.

The New Zealand to Australian dollar exchange rate is forecast to decline to 0.94 by year-end, and fall yet further to 0.92 by June 2017.

Watch this space, I get the sense ANZ will be revisiting their negative NZD forecasts over coming months in light of the resilience witnessed thus far in 2016.

FX Markets Today

With the markets primarily correlated to the ebb and flow of sentiment around this week's event in the UK, today's testimony to the upper house of Congress by Fed Chair Yellen may provide a short-term distraction.

She will testify to the Senate Banking Committee today, followed by the lower house on Wednesday.

These are ordinarily important, however, coming so quickly after last week’s Fed policy meeting, may be less informative than usual.

Markets initial interpretation of last week’s Fed policy statement and of Yellen’s subsequent press conference was that the Fed is in no hurry to raise interest rates.

As a result the probability being placed on a rate hike by the end of 2016 has fallen to less than 40%. Today’s testimony gives the Fed Chair an opportunity to signal whether markets are correctly interpreting the FOMC’s intentions.