The New Zealand Dollar could forge ahead in 2018 as the uncertainty prompted by regime change becomes a thing of the past.
MUFG - the global investment banking giant - predicts 2018 could be a better year for the New Zealand Dollar as the currency puts behind the woes of 2017; a year that saw the New Zealand Dollar slip to the bottom of the G10 currency league tables.
2017 saw the NZ Dollar manage to eke out a 2.4% gain over the US Dollar in a year where the greenback lost double digit numbers against other currencies. The New Zealand Dollar shed more than 6% against the US Dollar during the final three months of the year, reducing its overall gain to the feeble 2.4% flagged by Halpenny, as traders and investors marked down the country’s growth prospects in response to the September election outcome.
The New Zealand Dollar lost nearly 10% of its value against the Euro while losing 7.5% against the Pound.
The woes, "probably reflects the outcome of the general election with the Labour Party going into government. But with so much bad news already out there, we are not convinced the NZD will slide further,” says Derek Halpenny, European head of global markets research at MUFG.
That election brought a Labour-led coalition into power and opened the door to a wholesale reform of the Reserve Bank of New Zealand, protectionist housing market measures that risk deterring foreign investment and an immigration clampdown that economists fret could slow the pace of longer term economic growth.
Admittedly, the tangible consequences of that electoral outcome have thus far been limited to a plunge in the level of consumer and business confidence. Markets could be waking up to the overreaction as over the course of the past month we can see the New Zealand Dollar has climbed to the top of the leader board and is outperforming all major currencies. Can this positive start to the year extend into coming months?
“The plunge in confidence looks overdone and is likely to recover while the favourable global backdrop should help provide support for corporate and household confidence,” Halpenny notes.
It’s true that New Zealand economic growth slowed markedly in recent times, dropping from 4.8% in the second quarter of 2016 to 2.2% in the first quarter of 2017.
But this was before the election and the economy was already shown regaining momentum by the third quarter of 2017, with growth rising back to 3%.
“The Q3 GDP data was also accompanied with upward revisions to past data suggesting the economy may be closer to full potential growth rate than previously assumed,” Halpenny flags.
Fourth quarter data will provide insight into the economy’s performance since the election, although this is yet to become available.
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“The government’s choice for RBNZ Governor is also a good one. Adrian Orr has past RBNZ experience which will alleviate concerns over RBNZ policy uncertainty,” says Halpenny.
A substantial part of the New Zealand Dollar weakness seen in recent months was the result of concerns over the path of NZ monetary policy.
Labour’s review of the RBNZ mandate, likely to result in it being lumbered with an obligation to target full employment alongside steady inflation, led some to expect that NZ interest rates will remain lower for longer than they might otherwise have.
It also stoked concerns over the bank’s independence which, amid uncertainty already created by the departure of former RBNZ chief Graeme Wheeler and his replacement with acting governor Grant Spencer, acted as a double-barrelled negative for the Kiwi currency.
But since the election the government has appointed a new RBNZ chief, Adrian Orr, who takes the helm in March. He is both and RBNZ and financial services veteran who most recently ran New Zealand’s sovereign wealth fund.
Orr’s assumption of big chair at the RBNZ in March could help provide further clarity around the path of Kiwi monetary policy and, when combined with an economy that might be managing better than many had thought, could help ignite hopes that an NZ interest rate rise might come sooner rather than later.
“We expect a greater gain for the NZD this year relative to the modest gain recorded last year,” says Halpenny.
The RBNZ has held the New Zealand cash rate at 1.75% since late 2016 and, judging by interest rate derivatives market pricing, traders do not currently expect that to change until February 2019.
If markets were to bring forward the date at which an interest rate rise is implied, which might happen in response to a better than expected economic performance, then the New Zealand Dollar would be sure to benefit.
MUFG forecast the NZD/USD rate will finish the 2018 year at 0.7400, which implies a gain of 2.8% from the current 0.7198 level.
The NZD/USD pair has already gained 1.68% so far this January and so, when taken together with the above, MUFG’s forecast implies a total 2018 gain for the pair of around 4.5%.
On a separate note, MUFG’s GBP/USD (1.4680) and NZD/USD forecasts imply an expectation among the bank’s strategists that the Pound-to-New-Zealand-Dollar rate will rise from the 1.8769 seen on Wednesday, to 1.9837 by the end of the year.
This means that, despite the NZ economy continuing to tick along at a reasonable pace, Kiwi buyers in this corner of the world should still be quids in through 2018.
Readers can learn more about what other economists, analysts and strategists say is in store for the New Zealand Dollar in 2018 here; Compilation of Major Bank Forecasts, Currency Views for 2018.
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