Thu Lan Nguyen, FX Strategist at Commerzbank AG, on New Zealand economy and Kiwi

Note: This section contains information in English only.
Source: Dukascopy Bank SA
© Thu Lan Nguyen
According to ASB economists, the main challenges for New Zealand lie on the export front. Dry conditions are starting to bite in several regions around the country, which will crimp dairy production and soften meat prices through added livestock slaughter. Do you agree that exports is the biggest issue at the moment? When do you expect the diary prices to recover? 

Of course, the development of exports is the key to economic growth in New Zealand. So far, the economy has been growing quite strongly though, at rates above potential. While it is unlikely to maintain high growth rates of around 1% quarter on quarter, not least due to the factors you mention, we believe it is still growing solidly. Overall, we expect the GDP to grow by 3% this year. Therefore, the decline of export prices, in particular dairy products, will be compensated by a weaker Kiwi. Hence, I believe that low inflation against the background of a relatively strong economy is a bigger problem. 

Global risks combined with the plunge in oil prices have pushed down interest rates around the world. New Zealand's inflation outlook has changed dramatically in a relatively short space of time, whereas it starts to appear as if it could grow at a fast pace without generating much inflation. What actions do you expect from the RBNZ in regards of the interest rates? 

At the latest meeting of the Reserve Bank of New Zealand, it has already switched from a hawkish to a neutral stance, by dropping the reference to higher interest rates in the not too distant future. At the current moment, it is even open to cutting rates, and in fact, that is what we believe the RBNZ will do at its March meeting. Hence, it will fully participate in the global depreciation race, because if it does not follow the trend of monetary policy easing it risks an appreciation of its currency which in turn dampens inflation. 

What events could determine the behavior of Kiwi until the end of Q1 of this year? 

We believe the Kiwi will be driven by the RBNZ pace of easing, particularly compared to the major central banks. It still has much room to ease, considering that interest rates in New Zealand are still relatively high. It will mostly depreciate against the currencies of those central banks which do not have room to ease further or are not willing to ease, such as the Fed and BoE. However, it will appreciate against the currencies of those central banks which are further ahead in the depreciation race due to their ultra-expansionary policy, such as the ECB. 

What are your forecasts for EUR/NZD, AUD/NZD and GBP/NZD for the end of Q1 2015?


Looking at the EUR/NZD pair, we expect it to trade at 1.49, whereas 1.00 is our forecast for the AUD/NZD. Finally, we anticipate the GBP/NZD to reach 1.99 by Q1 of 2015.

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