NZD: Where to now for kiwi? – Deutsche Bank

Tim Baker, Strategist at Deutsche Bank, explains that it’s been over a month since the change in NZ government and the consolidation post the sell-off has broadly played out as NZD is up 1c vs AUD, and down 1c vs USD.

Key Quotes

“What’s next? Fears persist of another leg-down, based on the coming impact of government policy around areas such as migration and housing, and what might happen to productivity in general. There’s also the fact that NZD looks expensive vs rate differentials, and on our suite of valuation measures. Still, we’re not persuaded by the bearish case, for six reasons:

1. When assessing valuations for commodity currencies we like the DBeer framework, since it incorporates terms of trade (the PPP metric has been saying NZD is over-priced for 15 years). NZD’s slide on the DBeer approach is significant– from 5% over-valued to 5% under-valued, and from third most expensive in G10 to sixth. Relatedly, NZD looks cheap vs AUD when compared to relative commodity prices.

2. The government’s planned migration cuts already look priced. And the change in policy is simply taking NZ population growth from ‘extremely strong’ to ‘very strong’. 

3. House prices have already levelled off – they haven’t moved over the past year, after years of ~10% growth. So it’s not clear there’s been a lot of foreign flows in recent history that could be dissuaded by a change in government policy.

4. Productivity in NZ has been quite good in recent years, consistent with the reputation of its reform-minded government (though there does look to be some convergence to Australia of late). Any roll-back of reform could hurt here. But we tend to think government involvement in an economy is often overstated, and it’s noteworthy that recent sentiment indicators haven’t been too bad. Also, NZ is hardly an outlier when it comes to complicated politics. 

5. NZ’s labour market remains very tight. That’s not simply a reference to a low unemployment rate – there’s high participation also. Relative employment ratios point to AUD/NZD below 1.10. And the government plans to increase the minimum wage.

6. Positioning looks to have unwound a lot already, based on IMM and our option flow indicator.”

“Bottom line: We don’t see much NZD weakness from here. Our forecasts have NZD flattish vs USD through 2018, but we expect it to rise vs AUD (AUD/NZD down to 1.07 by mid-2018).”