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New Zealand Dollar Rises as Business Confidence Recovers ahead of Latest RBNZ Update

© Filipe Frazao, Adobe Stock

- NZD accelerates as business confidence breaks six-month decline.

- Data, price action comes ahead of latest Reserve Bank rate decision.

- But growth, interest rate and NZD outlook remain bearish say analysts. 

The New Zealand Dollar advanced against rivals Wednesday after the latest Australia & New Zealand Banking Group (ANZ) survey showed business confidence snapping a six-month decline in September, ending a period of deterioration that had stoked concern for the Kiwi economic outlook. 

ANZ business confidence rose to -38 in September, up by 12 points from a post-crisis low of -50, suggesting a lesser but still-substantial portion of New Zealand firms expect the general business environment to deteriorate over the next year. 

Firms' expectations of their own activity improved by four points, with a net 8% of companies now anticipating that their own business situation will improve slightly during the year ahead although this remains substantially below the long term average of 27%.

The confidence index has been below zero ever since September 2017, the month of New Zealand's last election, which marked the beginning of a process that culminated with the Labour Party entering office alongside coalition partner New Zealand First.

"It is encouraging that nearly all activity indicators out of the ANZ Business Outlook survey rebounded this month, with only investment intentions deteriorating further. The growth signal coming out of the survey remains weak, certainly. But if the indicators continue to rebound, it will increase the odds that while the economy may have hit a pothole, the wheels are not falling off," says Sharon Zollner, chief economist at ANZ. 

Coalition has given Labour the parliamentary majority needed to implement its cocktail of left-leaning and "populist" policies that have included a 20% increase to the minimum wage by 2020, the cancellation of corporate tax cuts and roll-out of various new welfare programmes. 

Slashing migration and shutting foreign buyers out of the market for existing residential properties have also been among its early priorities. 

The result for the economy has been a steep decline in business confidence particularly among retailers and restaurants, who were hit hardest by the minimum wage increase, while expectations of an economic slowdown have been mounting. 

"While the pace of growth in the NZ economy has slowed over the past year, the fall in business confidence has been much larger. We suspect one of the reasons for the weakness in business confidence this year has been firms’ unhappiness with some of the new Government’s policies, in particular planned changes to labour laws," says Anne Boniface, an economist at Westpac

The NZD/USD rate was quoted 0.22% higher at 0.6657 Wednesday while the Pound-to-New-Zealand-Dollar rate was down 0.38% at 1.9755. The Kiwi was also higher against most other G10 currencies.

"NZD is the best performer overnight, strengthening on an improvement in business confidence," says Elsa Lignos, global head of currency strategy at RBC Capital Markets. "It speaks to positioning – on our measures NZD is the most crowded short in G10. The more interesting NZ event comes tonight with the RBNZ."

New Zealand's economy grew by 1% during the three months to the end of June which, up from 0.5% at the beginning of the year, was more than twice the 0.5% expansion the Reserve Bank of New Zealand (RBNZ) forecast. 

However, despite this being above forecasts, the surprisingly strong growth seen in the second-quarter was still below the so-called "potential" of the economy. It is also expected to slow during the months ahead. 

For the RBNZ, which has been fighting against below-target inflation for a number of years now, this is a problem because slowing growth will only serve to sap more inflation pressure from the economy. 

Pricing in interest rate derivatives markets, which enable investors to protect themselves against changes in interest rates while providing insight into monetary policy, has shifted this year to suggest the central bank may soon choose to cut its interest rate.

"We expect the NZD to be a notable underperformer over the coming quarters, as low inflation and sub-potential GDP growth support the prospect of RBNZ rate cuts over the coming year. The RBNZ continues to recognise this through its reference to the next move being up or down, and an alternative scenario added to the August MPS showing 100bp of rate cuts if GDP growth remained below trend," says Hamish Pepper, a currency strategist at Barclays

The Reserve Bank of New Zealand has held its interest rate at a record low of 1.75% ever since November 2016 and has warned repeatedly of late that the next move could be either up or down. Deputy governor John McDermott said in August the odds of a rate cut have increased this year.

The RBNZ interventions have dealt a blow to the Kiwi, helping it fall by 8% against the U.S. Dollar during the nine months to the beginning of September 2018 and 5% decline against Sterling, because until then markets had looked for the central bank to lift its cash rate from the current record low of 1.75% around the middle of 2019.

"US-NZ interest rate differentials are likely to widen materially over the coming year as the RBNZ remains on hold while the Fed tightens 100bp over that time. We also expect the AUD to outperform the NZD on the expectation that the RBA will hike earlier than the RBNZ," Pepper adds.

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