The Kiwi dollar was doing quite nicely, climbing steady but with no great dramas, until New Zealand’s unexpected emergence from recession – as per data issued Wednesday – put a rocket under it, driving the Kiwi to a 13-month high against the US dollar.
Helped also by figures on Tuesday showing that New Zealand posted the narrowest current account deficit in more than four years, the currency has gained nearly 3 per cent in just two days – and a total of 27 per cent against the US dollar in six months.
And against the pound, the recent moves have been even more extreme:
As Bloomberg reported on Wednesday, the NZ dollar surged as high as $0.7312, the most since August 2008 and up from $0.7194 before the figures were released. By late afternoon, it was trading 1 per cent higher at $0.7262 and against the yen, had jumped as high as Y66.27, the most since October 2008, before settling at Y65.89.
The surge followed Wellington’s surprise announcement that the New Zealand economy is unexpectedly expanding for the first time in six quarters on rising consumer spending and strong exports. GDP increased 0.1 per cent in the three months to June 30 following a 0.8 per cent drop in the first quarter, according to government figures.
The strong figures contradicted widespread predictions for further economic contraction, including from the country’s own Reserve Bank governor Allan Bollard – who earlier this month predicted a Q2 GDP contraction of 0.1 per cent, and this one from Westpac, which just last week forecast a quarterly, Q2 0.2 per cent contraction, or an annual decline of 2.7 per cent. Bloomberg notes that the median estimate from a survey of 12 economists was for a 0.2 per cent contraction.
In forex markets, traders were betting that the central bank’s Bollard may raise interest rates sooner than he indicated earlier this month. When he forecast a further GDP contraction on September 10, Bollard said the benchmark interest rate needed to stay at a record-low 2.5 per cent until late next year.
Markets, notes Bloomberg, now expect that Bollard will raise the official cash rate by 149bp over the next year as the economy recovers, according to a Credit Suisse index based on swaps prices.
However, note analysts, Bollard may be reluctant to raise the benchmark rate too soon for fear of strengthening the currency too much and dampening exports, which make up 31 per cent of the economy.
Sounding a note of caution, NZ finance minister Bill English warned on Wednesday that much of New Zealand’s growth in recent years had been based on a combination of consumer debt and government spending, causing serious structural imbalances and an underpowered export sector.
Yet economists in Australia and New Zealand are forecasting third quarter GDP growth of around 0.6 per cent as the markets focus on more timely data. As the FT noted, they expect a more positive payback from inventory, a pick up in investment and exports.
So where to from here? Westpac, revising its earlier predictions of further economic contraction, sees the difference in yields between five- and 10-year New Zealand swap rates narrowing amid growing expectations of rate increase. And, added Bloomberg:
Traders increased wagers [on Wednesday] on gains in New Zealand interest rates to 1.53 percentage points over 12 months, from 1.36 [on Tuesday], according to a Credit Suisse index based on swaps trading. New Zealand’s two-year swap rate, which is sensitive to expectations of rate changes, rose 10 basis points to 4.28 per cent, the most since January.
Australia’s currency meanwhile has also benefited amid rising prices of gold and crude oil, key Australian commodity exports, touching $0.8788, the most since August 2008. Against the yen, the currency was at Y79.48 from Y79.56. But that’s another story…
Related links:
Kiwi, Aussie dollars at 13-month highs as NZ recession ends – Bloomberg