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In the recent years the New Zealand economy has been boosted significantly by the Canterbury earthquake rebuilding effort. Construction activity has also been supported by a robust real estate market; though that impact has waned in recent months. Furthermore, consumer spending has been strong as the growing economy has lifted consumer confidence. Apart from these factors, surging milk prices and exports have also been important factors driving the New Zealand economy. All in all, the growth outlook for New Zealand further this year remains a solid of 3%. Particularly if global growth were to pick up later in the year.
New Zealand house sales slumped 11 percent between October and March; however, the RBNZ had expected sales to fall by between 3 percent and 8 percent in the year through October 2014. Do you think that the economy is ready for the loan limit removal late this year or is it hard to predict how the housing market will react to interest rate increases?
New Zealand home sales volume has declined sharply over the past six months. House prices have not been corrected at all, with New Zealand home prices reaching a new high in April, though the rate of increase appears to be moderating. I think it will be quite difficult to predict exactly how the housing market will react to the higher interest rates. The market is currently pricing in another three rate hikes by the RBNZ over the next 12 months, which would take the official cash rate to 3.75%. This should help to restrain the housing market to some extent, but it is worth noting that this is still a rather low level by historical standards in New Zealand. Also the robust domestic economic picture suggests that the demand for housing should stay healthy as household finances improve. Nonetheless, it is clear that the RBNZ intends to cool down the housing market, so it would tighten further if the housing market were to accelerate from here. Given the reaction function of policymakers I would expect that they will be able to moderate the housing market, but it will likely require further rate hikes. The Kiwi has appreciated 4.37% against the greenback year to date, making it one of the hottest currencies among the majors this year.
What could be the main drivers for the remaining part of this year besides a further rate increases?
I think so long as volatility in global markets remains low, the carry rate will become more attractive to investors. This will support the Kiwi Dollar, which is after all the highest yielding G10 currency and is expected to remain so for the foreseeable future. The combination of low market volatility and high positive interest rate spread should hold up Kiwi over the near future.
What are your forecasts for NZD/USD and AUD/NZD for the short term and longer term?
The issue with NZD/USD is that a lot of good news on the New Zealand economy and RBNZ rate hikes expectations are priced in. Also the Kiwi is expensive on long-term valuation metrics. We think that AUD/NZD in particular is bottoming out at the 1.05 level. So we are bullish on the AUD/NZD cross over a medium term horizon of six months to three years. We believe the AUD/NZD will continue to trade in range under 1.10 probably through the summer but move higher towards the 1.12 level towards year-end and into early 2015. For NZD/USD we see a potential for it to move higher over the course of the summer towards the 0.87 level. This forecast is premised on volatility in global markets remaining low over the summer. But we do see NZD/USD coming under pressure into year-end, and ending the year at 0.84 cents as the US dollar starts to recover on the back of rising Fed rate expectations for next year.