NZDJPY climbs to a new 7-year high

It has been a stellar month for NZDJPY as widespread yen weakness has propelled the pair to a new 7-year high. Also, the divergence of monetary policy objectives between NZ and Japan is making the carry trade between the kiwi and yen more attractive. There was a small setback for the kiwi earlier today after some bearish comments about the NZ dollar from RBNZ Governor Wheeler following the release of the bank’s Financial Stability Report, but the kiwi has since retraced most of this lost ground on the back higher price setting by NZ’s biggest dairy producer.

Today’s report proved that the RBNZ is still very concerned about the threat of house price inflation and it isn’t willing to risk removing LVR restrictions at this time. Wheeler stated that the reduction in house price inflation and housing credit growth are welcome developments, along with indications of increased residential building. However, there remains a risk of a resurgence in house price inflation, particularly in light of strong immigration flows. Consequently, we do not consider it appropriate to ease the LVR speed limit at this time. The Reserve Bank will continue to closely monitor the housing market.”

Last year the RBNZ outlined that retail banks would be restricted to having only 10% of total new home loans with initial deposits of under 20%. Prior to this, low-equity mortgages accounted for around 25% of all home loan at the major banks. Now, they only account for around 7-8% and upward pressure on house price inflation has eased substantially (house price inflation has fallen to around 6% from 10% a year ago).

While some of this success can be attributed to higher interest rates, the LVR restrictions are clearly working. We postulated yesterday that it may be time for the bank to consider loosening the limits. While it’s unlikely the RBNZ will completely remove the restrictions for fear that it will stoke another push towards low-equity loans, the bank may push the LVRs up to 15-20% of total home loans by the end of the year.

The fact that the RBNZ considers it too soon to remove the LVR restrictions highlights how different the bank’s monetary policy objectives are to those of the BoJ. Last week the BoJ announced another massive bout of stimulus which is designed to support the economy and promote inflation. This is in stark contrast to the RBNZ’s recent attempts to ease inflationary pressures within NZ.

As we stated earlier, this make NZDJPY an attractive play for yield seekers. We expect this theme to continue to support NZDJPY in the long-run. However, the pair is starting to look somewhat overbought in the short-term, thus we cannot rule out a retracement. If this happens we will keep an eye on an important support zone around 89.00.