Is New Zealand in a Sweet Spot?

Well, if Reserve Bank of New Zealand (RBNZ) Governor Alan Bollard is to be believed, it is! According to the central bank head honcho, New Zealand is in a “reasonably sweet sort of spot” with regard to its current monetary policy.

With the way things are going, Bollard believes New Zealand doesn’t need to lower borrowing rates. And I can’t say I disagree. Relative to many other major economies, New Zealand certainly does look quite attractive if you consider its growth potential. Growth is forecasted to clock in at 3.3% this year and 2.9% in 2012.

Its rebuilding efforts in the wake of the Christchurch earthquake, and the continued strength in trade thanks to China and other Asian countries have certainly done well to fuel the country’s recovery… so well that the RBNZ is already contemplating tightening monetary policy! How about that! While most major economies are leaning towards easing monetary policy, New Zealand is actually thinking of tightening policy!

But just because it’s a reasonable option for the central bank doesn’t mean that Bollard and his men are in a rush to raise rates. Though he believes it may have to bump up borrowing costs as the housing sector recovers, he claims the RBNZ is comfortable with sitting on its hands for now. Ah yes, the old wait-and-see approach!

If you ask me, it’s a wise decision on Bollard’s part. It’s probably best to wait and see how the whole Greek debt situation will play out. After all, even though Greece is half a world away, its debt woes can still have repercussions on New Zealand, as Bollard noted.

In the event that European officials are unable to contain its financial problems, it could affect medium-term funding for Australia and New Zealand. Australian banks are already having difficulty getting medium-term funding from European markets. If this continues until next year, it could squeeze credit lending and slow growth for New Zealand as well.

Another problem the Greek debt situation poses is that it could drag down growth in China and other developing and emerging Asian nations. For example, in the 2008, China’s exports experienced a huge drop as demand from Europe faltered, and this negatively affected New Zealand’s export industry too. It’s important to note that China imports a large amount of raw materials from New Zealand as well.

Where’s the Kiwi headed?

I’m no fortuneteller, but I’ll go out on a limb here and say that the Kiwi will probably go lower, despite the positive outlook for New Zealand.

For one, commodity prices have been falling. In August, commodity prices were reported to have decreased for the third straight month, and this move has been mirrored by the Kiwi.

Another cause for concern is the bearish tone of RBNZ’s Alan Bollard. He mentioned that he believes that the Kiwi is still overvalued, which is surprising considering the Kiwi is sitting at its 5-month low versus the Greenback.

And finally, threats to global growth, as well as worries about the European debt crisis, could continue to fuel risk aversion and push the Kiwi even lower.

NZD/USD 4-Hour Chart