NZD: Can't fight the tide - Rabobank

The better than expected outcome for the Caixin measure of Chinese April manufacturing PMI brought some relief to the NZD this morning and the uptick followed a sharp fall in the value of NZD/USD since the middle of last month that has taken the currency pair back to levels last traded in December, explains Jane Foley, Senior FX Strategist at Rabobank. 

Key Quotes

“The better tone of the USD has been a guiding force behind this move.  Over the next couple of weeks, the RBNZ policy meeting and the government’s budget should draw attention back to domestic factors.”

“There is little scope of a statistically significant correlation between NZ-US yield differentials and NZD/USD. The reasons for this are numerous. There is a better link between the NZD and milk prices meaning the outlook for this industry is likely to remain a more useful predictor of the value of kiwi.”

“There is currently risk that the RBNZ will keep policy on hold for a prolonged period.  This is in contrast to the policy outlook for the Fed.  We see risk that the draw of rate differential will put downside pressure on NZD/USD this year.  We maintain our year-end target of 0.68, with downside risk to this forecast.”

“It is likely that inflation in New Zealand will trade higher in the medium-term. Oil prices are on the rise and the softness of year-on-year food prices last quarter is a function of the weather related boost to prices in Q1 2017. That said, with CPI inflation close to the bottom of the RBNZ’s 1% to 3% inflation target there is speculation in the market that rates could be on hold even until the end of the decade.”

“Next week’s policy meeting will be the first of new governor Orr. It will also be the first when the central bank has to consider maximum sustainable employment alongside its inflation target. On first sight there would appear to be less to worry about on this front.  The Q1 unemployment rate has fallen to a 9 year low of 4.4%.   There were also signs of an upward lift to wages which grew 1.8% y/y last quarter.  Some of this gains was the result of the $2 bln pay equity settlements for care and support workers, though this will only have a temporary impact in raising wage inflation.  That said, a slowdown in the number of migrants entering the country should support wage growth.  Q1 data suggests that 9,000 fewer people reported being under-employed, though First Union has continued to warn of the relatively high level of underemployment in New Zealand.  High under-employment would suggest that labour market conditions are not as tight as headline data imply.  In turn this would also imply that the follow-through from a low unemployment rate to consumer demand may be stuttered.”

“Until there is a clear need for the RBNZ to move from its wait and see policy on interest rates, we expect the NZD to be vulnerable to the better tone of the USD.”