ECONOMETER

News and data in New Zealand has been positive this week, helping to propel the New Zealand dollar (NZD) higher over recent days.  Earlier in the week the NZD jumped following news that the world’s largest dairy exporter, raised its forecasts for payouts for the country’s farmers. 

The Kiwi also found support from better than expected current account data following news of a surprise NZD 0.124 billion surplus in Q2, which resulted in a sharp drop in the deficit to GDP ratio to 5.9%. Additionally Q2 GDP data revealed a surprise 0.1% expansion in the economy.  The rebound in growth suggests that recovery will not be as “patchy” as officials in New Zealand are predicting.  

Whether policymakers in New Zealand now change their policy stance will have important implications for the NZD.  The central bank, Reserve Bank of New Zealand (RBNZ), has been quite cautious, with the September Monetary Policy Statement highlighting a weak medium-term growth outlook.  The RBNZ has also intensified its focus on the level of the NZD which they note is at an “elevated” level.  

The Bank went as far as to state that a further appreciation in the NZD would put at risk the “sustainability of the present recovery”. This suggests there is some potential for intervention to prevent further NZD strength but recent data may result in a more accommodating stance of the central bank towards further currency strength in which they may be less concerned about NZD strength.

The RBNZ has indicated that interest rates will be kept at current levels or below until the latter part of 2010 but improving data suggests that the dovish stance of the central bank may be reversed somewhat and interest rates may be raised earlier.  It seems likely that the Bank will raise rates by around the third quarter of 2010.

The NZD is likely to remain well supported over coming weeks but the fact that the currency is trading at its highest level in over a year may prompt some profit taking, especially as it is looking overbought from a technical perspective.   The NZD maintains a high negative correlation with the USD index and much will depend on the overall tone of the USD and movement in commodity prices.  As long as equity markets continue to strengthen, the USD will remain under broad downward pressure, with any downward correction in the NZD likely to prove short lived.