What the Kiwi is Going On?

Like other so called ‘anti-dollars’, the Kiwi has benefited from the widespread increase in risk appetite. We’ve been seeing equities and commodities rise as more and more signs of recovery pop up these past few months. Considered as a commodity-based currency and having the second highest interest rate (2.5%) amongst majors, it shouldn’t come as a surprise that the Kiwi has been running the table. In fact, it has been rivalling the Aussie and the Loonie as the best performing currency – quite an honor, eh?

Looking at New Zealand’s latest economic reports, you’ll find that the country is in a better position compared to its Western counterparts. This past September, New Zealand’s trade gap has shrunk from N$719 million to N$424 million, its lowest level in six years. This suggests that a lot less capital is flowing out of the country compared to the past. This, of course, is better for the economy since net exports takes a good chunk of the country’s GDP. The drop in the account was due to the slide in imports which fell by 27% compared to a year earlier.

Although a drop in imports could indicate weakening domestic demand, retail sales points otherwise as it jumped 1.1% in August after falling 0.5% in July. The core version of the report, which excludes automobile sales, posted a 1.2% gain in the same period. Digging deeper into the report would reveal that the growth was caused by the increase in house sales due to immigration. As a result, New Zealand’s inflation rate accelerated to 1.3% during the third quarter, placing its annual rate at 1.7%, which is in line with the RBNZ’s target inflation range of 1%-3%.

Yet, despite all these recent improvements in the economy, the RBNZ remains unconvinced that recovery is sustainable. Even if economic conditions are starting to get better, as recent data suggests, there are some factors that continue to weigh down on the economy.

For one, the Kiwi’s unprecedented rise is now starting to be questioned. Apparently, the currency’s strength is beginning to be worrisome for a couple of New Zealand’s VIPs, namely Prime Minister John Key and RBNZ Governor Allan Bollard. Both expressed their concerns that the overvaluation of their local currency might keep inflation muted in the long-run and thus offset the impact of their easing policies. The persistent strength of the Kiwi also prevents the country’s export industry to truly blossom. Because of this, the RBNZ decided to hold off on any rate hikes until inflation and exports pick up pace.

Another concern that needs to be noted is the country’s weak labor market. One of the most reliable signs whether the economy is doing well, the country’s employment situation report, showed that joblessness expanded to 6.0% between April and July, much higher than the 5.6% expected.

Are investors starting to realize that they have overextended themselves by buying up the Kiwi too fast, too soon? Perhaps. Couple this with the commitment of the RBNZ to keep rates steady, it seems that Kiwi, a candidate for “the best performer” title, wouldn’t be ending this year with a bang like initially expected. If fundamentals and risk sentiment continue to weigh down on the currency, the 0.8000 price handle will nothing be more than a far-fetched fantasy for the Kiwi bulls…