Kiwi can grind even higher against dollar
LONDON: The New Zealand dollar, often referred to as the Kiwi, may still have room to appreciate against its US counterpart, given the contrasts between the two economies.
The kiwi has, to the discomfort of policymakers, been gradually strengthening against the US dollar since early June, hitting a 17-month high of $ 0.8534 in mid-February.
While Finance Minister Bill English has described the exchange rate as “a real headwind to rebalancing the economy,” he has acknowledged there is a limit to what New Zealand can do about it.
For now, though, the headwind continues to blow.
While US policymakers remain divided over ways to cut the country’s fiscal deficit the government fiscal gap in New Zealand for the eight months to February was lower than forecast due to a higher than expected tax take.
New Zealand’s government aims to return to a fiscal surplus in the next two years and pay down debt.
Although both countries are struggling with high unemployment, New Zealand is arguably in a slightly better position and the outlook of the local central bank seems markedly different to that of the US Federal Reserve.
US employers hired at the weakest pace in nine months in March, with non-farm payrolls expanding by just 88,000.
While the US unemployment rate fell to 7.6 percent, the lowest since December 2008, the improvement was largely illusory, driven by a fall in the labor force participation rate by 496,000 people, to a level not seen since 1979.
“If spells of unemployment have a persistent impact on income, wealth and home ownership, then a more aggressive response to persistently high unemployment rates is warranted,” Boston Fed President Eric Rosengren said on Friday.
New Zealand’s unemployment rate came in at 6.9 percent in the first quarter, down from a 13 1/2 year high of 7.3 percent in the previous three months, but again this was due to a sharp fall in the number of people seeking work.
However, optimistic employees in New Zealand outnumbered pessimists for the first time in 18 months in the first quarter, suggesting a possible improvement in the labor market later in the year, a survey indicated on April 1.
But while the US Federal Reserve is set to keep interest rates near zero until unemployment drops to 6.5 percent or so, the Reserve Bank of New Zealand seems to have other priorities.
RBNZ Deputy Governor Grant Spencer said on Monday that strength in housing prices was starting to cause concern and could prompt an interest rate rise.
The RBNZ has held its benchmark cash rates at a record low 2.5 percent for the past two years.
Already offering an attractive yield differential over near-zero US rates, even the possibility of a hike in New Zealand later in the year could underpin demand for the kiwi.
The RBNZ will also be aware that New Zealand’s export position remains solid despite the kiwi’s relative strength.
The latest trade figures showed New Zealand had a bigger-than-expected trade surplus in February, leading to a narrower annual deficit.
Illustrating the point further, prices for New Zealand’s main commodities posted their eighth consecutive month of gains in March, according to ANZ Bank’s commodity price index.
The index includes commodities which make up around 60 percent of New Zealand’s NZ$ 46 billion annual export earnings.
It might be too much to expect the New Zealand dollar rise to the level against the greenback seen on Aug. 1, 2011, but a grind toward 0.8650 might be conceivable in coming weeks.
— Neal Kimberley is an FX market analyst for Reuters. The opinions expressed are his own.
