Market Analysis

NZD: Too Far Down Under?

As US firm BNYMellon wrote on Tuesday since the election a month ago the fall in the value of the New Zealand dollar versus the US dollar (NZDUSD) has been “at the upper end of monthly declines seen since the financial crisis, albeit one that has taken place in an orderly fashion.” The US firm notes that this fall has occurred against the backdrop of a narrowing of the gap between the more highly yielding New Zealand 2-year, 5-year and 10-year paper and equivalent US Treasuries. Yet as Canada’s TD Securities wrote, also on Tuesday, the political programme already announced for the new ruling coalition’s first 100 days in office “if implemented as planned, is rather inflationary, from both a supply and demand perspective.”

TD takes the view that “with a stronger Q3 NZ CPI outcome and a much weaker exchange rate than expected, a simple update of the RBNZ’s inflation model sees significant upside, even without referring to the new [government’s] policy agenda.” The Canadian firm also notes that AUDNZD has reached an 18 month high, adding that if the new NZ government fiscal plans do prove inflationary then New Zealand’s central bank “has ample fuel to turn hawkish.” Such logic might lead some to wonder if the NZD is getting a little oversold, given how far it has fallen out of favour on the currency markets in recent weeks. Whether or not traders as a whole agree is an open question.

Written by Neal Kimberley, External Currency Analyst.