Monthly Economic Review: New Zealand Dollar

Since my last look at the New Zealand economy, economic data continues to show resiliency from the Kiwis. Check out the latest data that has the RBNZ sitting tight on rate cuts and possibly further support for the Kiwi dollar.

1. Dairy Prices

For quite some time, the New Zealand trade balance data was looking downright ugly as it posted deficits in the hundreds of millions of New Zealand dollars since the summer of 2014. A big part of that pain was the fall in commodity prices, specifically dairy prices (milk is one of New Zealand’s largest export products).

The Global Dairy Trade (GDT) price index started to turn in mid-2014, going from an index level of 1055.05 in July 2014 to bottom out in Dec. 2014 at 739.3. Fortunately, the drop in inflation pressures have seemed to stabilized, and February and March saw big jumps in prices with the index printing within a range between 850 – 950. Unfortunately we just saw a -10% drop in the latest GDT read to 785.1, so NZD bulls can’t get too excited just yet of a complete turnaround.

2. Trade Activity

With the bounce back in dairy prices playing a big role, New Zealand was able to print two months of trade surplus (NZ$33M in January and then a NZ$50M surplus in February), getting it out of the hundreds of millions of dollars, monthly deficit cycle of the past seven months. Besides dairy prices, demand for meat products have improved and stabilized as well, up 12% year-over-year driven by exports to the U.S.

While the recent trade balance reads are still much weaker than last year (NZ$797M Surplus in Feb 2014), with two recent months of surplus reads, we’re only one more read away before we can potentially declare a bottom, and hopefully the beginning of a recovery in the trade sector, which New Zealand heavily relies on.

3. Housing Sector

With exception to a couple of negative price dips in December and January, the New Zealand housing market continues to rock and roll. The milk and beef must be really awesome and drawing crowds to New Zealand because we saw another 0.8% increase in prices in February and total homes sold up 42.5% vs. the seasonally slow month of January. The recovery in the housing market is definitely still in full effect and goes to show how strong the domestic economy has been and may continue to be going forward.

Overall, the strength and recovery path we saw back in February is still rolling as we go into April, and it’s no wonder why the RBNZ bucked the recent central bank trend of easing monetary policy. While weak global inflation and growth is on the RBNZ’s radar, their strong domestic economy, housing market, and improving commodity prices continues to put them between a rock and a hard place on where they should go next with interest rate policy.

For now, I think this keeps Kiwi dollar forex traders from taking big bets one way or another, but still, the slight bullish bias remains because of that sweet positive interest rate carry that their relatively high interest rate brings. What do you think?

  • ForExchange

    Hi Forex Gump,

    this interest rate question is very interesting. I have seen many brokers and for some you do not even make carry trade revenue with the NZD. These carry trade calculations are interesting between brokers. I also like to recieve it, but traders really have to do a good job to find the right broker if they want to make long-term money based on carry trades.

    FE

    • That’s true, it could really depend on the broker and also on the trader’s time frame for holding on to the trade. For position trades I generally favor the ones with positive interest rate differential since my broker does offer carry revenue.