Year in Review: The kiwi's surprising strength

Forex 7 minutes to read

John Hardy

Head of FX Strategy

Summary:  The surge in the trade-weighted New Zealand dollar over the last quarter of 2018 against a backdrop of weak risk appetite has been one of the most surprising developments among the smallest of the G10 currencies.


The New Zealand dollar finished 2017 on a weak note after the September national election resulted in a center-left and left populist government coalition that vowed to curtail foreign purchases of New Zealand real estate and limit immigration.

After stabilising early this year on the assumption that the government’s bark would prove worse than its bite the NZD, or kiwi, took a fresh dive as Adrian Orr was nominated Reserve Bank of New Zealand governor in March. Orr quickly established himself as a loud dove on policy, opening up forward guidance to the potential for both rate cuts as well as rate hikes in an environment in which most global central banks were clearly pointing toward the withdrawal of policy accommodation.

The trade-weighted kiwi bottomed out in early October before launching a near vertical ascent, even as global market. In past market cycles of weak global risk sentiment, the kiwi has fared rather poorly and we struggle to put together a narrative that explains the kiwi’s marked resilience and even strength into the end of this year. 

JP Morgan NZD CPI-adjusted real effective exchange rate

After a long period of weakness for the reasons we mentioned above, the kiwi sprang to life from early October and crossed well back above its 40-week moving average. The period of NZD strength in from 2011 to 2014 flatters the currency, as the historic range stretches all the way down to 80 and even lower – suggesting that levels significantly above the 100 area are overvalued.

Source: Bloomberg

One potential source of relative strength may be the market’s increasingly pessimistic take on the outlook for Australia’s economy relative to the outlook for New Zealand and interest in selling AUDNZD.

Australia’s housing bubble showed signs of a disorderly unwind as 2018 was drawing to a close. The fall in Australia’s housing prices was at least partly triggered by tightening lending standards after a profound and embarrassing review of sharp bank practices under a Royal Commission.

New Zealand’s housing market has also been under pressure, but the focus there under the previous RBNZ governor on macroprudential rules to restrict over-easy lending standards into the sector has helped to  prevented the excesses evident in Australia.

Chart: AUDNZD monthly


Australia is New Zealand’s largest trading partner after China and the AUDNZD rate has declined to the lower end of its multi-year range, with much of the recent part of the move arriving after the RBA admitted that rate cuts and QE are a theoretical possibility if the housing bubble unwind become dire, even while expressing confidence that the next move would be a hike.

If AUDNZD nears parity, it is approaching a rare extreme that historically has proven a bridge too far for NZD strength.

Source: Saxo Bank

Regardless of the set of drivers, the New Zealand dollar looks very expensive going into 2019 and we suspect it will end next year far weaker than the levels prevailing here at the end of 2018 on value mean-reversion and the risks to global growth.

Disclaimer

Saxo Capital Markets (Australia) Pty Ltd prepares and distributes information/research produced within the Saxo Bank Group for informational purposes only. In addition to the disclaimer below, if any general advice is provided, such advice does not take into account your individual objectives, financial situation or needs. You should consider the appropriateness of trading any financial instrument as trading can result in losses that exceed your initial investment. Please refer to our Analysis Disclaimer, and our Combined Financial Services Guide and Product Disclosure Statement. All legal documentation and disclaimers can be found at https://www.home.saxo/en-au/legal/.

The Saxo Bank Group entities each provide execution-only service. Access and use of Saxo News & Research and any Saxo Bank Group website are subject to (i) the Terms of Use; (ii) the full Disclaimer; and (iii) the Risk Warning in addition (where relevant) to the terms governing the use of the website of a member of the Saxo Bank Group.

Saxo News & Research is provided for informational purposes, does not contain (and should not be construed as containing) financial, investment, tax or trading advice or advice of any sort offered, recommended or endorsed by Saxo Bank Group and should not be construed as a record of our trading prices, or as an offer, incentive or solicitation for the subscription, sale or purchase in any financial instrument. No representation or warranty is given as to the accuracy or completeness of this information. All trading or investments you make must be pursuant to your own unprompted and informed self-directed decision. No Saxo Bank Group entity shall be liable for any losses that you may sustain as a result of any investment decision made in reliance on information on Saxo News & Research.

To the extent that any content is construed as investment research, such content was not intended to and has not been prepared in accordance with legal requirements designed to promote the independence of investment research and as such, would be considered as a marketing communication.

Please read our disclaimers:
- Full Disclaimer (https://www.home.saxo/en-au/legal/disclaimer/saxo-disclaimer)
- Analysis Disclaimer (https://www.home.saxo/en-au/legal/analysis-disclaimer/saxo-analysis-disclaimer)
- Notification on Non-Independent Investment Research (https://www.home.saxo/legal/niird/notification)

Saxo Capital Markets (Australia) Pty Ltd.
Level 25, 2 Park Street
NSW 2000
Sydney
Australia

Australia

The Saxo trading platform has received numerous awards and recognition. For details of these awards and information on awards visit www.home.saxo/en-au/about-us/awards

Saxo Capital Markets (Australia) Pty Ltd ABN 32 110 128 286 AFSL 280372 (‘Saxo’ or ‘Saxo Capital Markets’) is a wholly owned subsidiary of Saxo Bank A/S, headquartered in Denmark. Please refer to our General Business Terms & Combined Financial Services Guide & Product Disclosure Statement to consider whether acquiring or continuing to hold financial products is suitable for you, prior to opening an account and investing in a financial product.

Trading in financial instruments carries various risks, and is not suitable for all investors. Please seek expert advice, and always ensure that you fully understand these risks before trading. Trading in leveraged products such as CFDs and Margin FX products may result in your losses surpassing your initial deposits. Saxo Capital Markets does not provide ‘personal’ financial product advice, any information available on this website is ‘general’ in nature and for informational purposes only. Saxo Capital Markets does not take into account an individual’s needs, objectives or financial situation.

Apple, iPad and iPhone are trademarks of Apple Inc., registered in the US and other countries. AppStore is a service mark of Apple Inc.

The information or the products and services referred to on this website may be accessed worldwide, however is only intended for distribution to and use by recipients located in countries where such use does not constitute a violation of applicable legislation or regulations. Products and Services offered on this website is not intended for residents of the United States and Japan.
Please click here to view our full disclaimer.