Year in Review: The kiwi's surprising strength
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.
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.
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.
Latest Market Insights
Outrageous Predictions 2023: The War Economy
- The constantly growing global need for energy drives the world's richest to huddle up and launch a R&D project in a size the world hasn't seen since the Manhattan Project gave the US the first atomic bomb.
French President Macron resignsThe political stalemate in France and the rise of Marie Le Pen following the 2022 elections corners President Macron, forcing him to give up on politics and resign from his position. At least for now.
Gold rockets to USD 3,000 as central banks fail on inflation mandateAs markets and central banks realise that the idea that inflation is transitory is wrong, and that prices will remain higher for longer, gold is sent through the roof, hitting a price tag of USD 3,000
EU Army forces EU down path to full unionWith continued challenges in the region and a US military that isn't aggressively enacting its former role as global policeman, the European Union agrees to create its own armed forces, bringing the whole region closer.
A country agrees to ban all meat production by 2030In an effort to become one of the global leaders on the path to net-zero emissions, one country decides to not only put a heavy tax on meat, but to ban domestic production entirely.
UK holds UnBrexit referendumFollowing a recession and domestic pressure, the United Kingdom is thrown into political turmoil that will end with a vote to wind back Brexit.
Widespread price controls are introduced to cap official inflationHistory tells us that with the war economy comes rationing and price controls. And this time is no different, as policymakers introduce strict price controls that lead to a range of unintended consequences.
OPEC+ & Chindia walk out of the IMF, agree to trade with new reserve assetSanctions against Russia have caused widespread turmoil due to US Dollar moves in countries across the globe that don't consider the US an ally. To relieve themselves from this, they leave the IMF and create a new reserve asset.
USDJPY fixed to the USD at 200 as Japan overhauls financial systemFollowing the challenges that faced the Japanese Yen in 2022, the Bank of Japan attempts to keep the currency from sliding. Unsuccessful on the long-term, Japan will launch a reset of its entire financial system.
Tax haven ban kills private equityWith the war economy comes an increased focus on national interests and sovereign nations' ability to assert themselves. In that regard, the OECD countries turn their attention on tax havens and pull the big guns out, banning them altogether.