NZD A Tough Call–Here’s Why
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Wednesday’s decision by the RBNZ
(Reserve Bank of New Zealand) to hold rates steady was seen universally as a
given, what transpired afterward, was not. Within moments, the NZD/USD was up
nearly 70 pips with very few offers on the way up. The NZD/USD has since
settled back down, but what we viewed as a solid short play with the other
commodity currencies that we are short, AUD and CAD, a closer look reveals that
the NZD is the odd man out this time.
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While the RBNZ expects domestic consumption to slow
dramatically into 2005 as higher interest rates combine with softening real
estate prices and reduced exporter income (due to high value of NZD), there are
risks. Consumer confidence and mortgage rates remain low. The competitive
nature of the New Zealand mortgage business has actually forced rates lower than
they were at the start of the year, despite 150 bp’s of hikes by the RBNZ. This
is one sector of the economy that has not responded to the rate hikes, but will
likely not be long lasting.
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The value of NZD will continue to be a key piece to the
macro outlook in New Zealand as we start the New Year. While it seems almost
certain that the tightening cycle will eventually place a drag on domestic
growth, the RBNZ made it clear on Wednesday that they still saw room for hikes
in the event of inflation risks; this statement appears to be the sole reason
NZD will remain a tough call on the short side until further data emerges that
suggests this hawkish stance can be abandoned.
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Technically, a short in NZD is still not clear cut either.
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As always feel free to drop me a line if you have any
comments or questions.
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Dave