NZD: Buffeted by cross-currents – SocGen

Domestic growth momentum in New Zealand waned in 4Q16 and 1Q17, and the bounce is expected to be tepid, according to Alvin T. Tan.

Key Quotes

“The tailwind from the Canterbury earthquake rebuild activity has largely passed. Home sales have fallen abruptly since late 2016. However, net immigration is still very robust, the labour market is buoyant and the terms of trade are pushing ever higher.”

Softening inflation pressures. Similar to other developed economies, NZ is finding inflation puzzlingly weak. The CPI reading for 2Q17 was a surprising 1.7%, which prompted the RBNZ to cut its inflation forecasts. The recent weakness in the housing market has also relegated a key financial stability concern to the sidelines. Preventing the Kiwi dollar from strengthening much further will be key to reviving inflationary pressures. Thus, we expect the RBNZ to remain firmly neutral through the forecast horizon.”

Cross-currents suggest NZD will underperform. The fundamental cross-currents buffeting the economy are mirrored by those affecting the currency. Although the terms of trade are climbing, milk powder prices have been moribund. NZ’s policy rate of 1.75% is the highest in G10, but we expect no policy shift. Consequently, NZD/USD should rise primarily as a product of the dollar downtrend, but we expect AUD/NZD to simultaneously head higher.”

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