15 October, 2013
The Kiwi is on an upward trend. Over the previous month, the Kiwi has appreciated by around 500 pips. Last week, we received news from the Reserve Bank of New Zealand (RBNZ) that an increase in interest rates will be apparent within the next year.
Consequently, the NZDUSD is presently situated at a 6 month high. Bearing in mind that the currency will be further boosted when the interest rate adjustment happens, it seems that the Kiwi is going to carry on accelerating in value.
Is it time to go long on the Kiwi, or will the recent uptrend be internally halted ?
The attempts to halt the Kiwi momentum:
New Zealand Finance Minister, Bill English attempted to awaken the bears recently by suggesting that the nation’s currency is too strong and overvalued. This came as no surprise. The Reserve Bank of New Zealand has been repeating this sentiment now for a number of months.
The main problem with the currency being at its current value is that it hurts export competitiveness. A higher-valued NZD may make their products unaffordable for their counterparts. There is an internal fear that the countries who they supply goods to may be able to find cheaper alternatives elsewhere.
Economic uncertainty elsewhere:
Additionally, two of their main trading partners are encountering their own economic problems. America is undergoing consistent challenges and they represent 10% of New Zealand's exports. Australia’s period of resurgence now looks to be slowing, and they contribute towards 20% of New Zealand's exports.
Elsewhere, a milk contamination scandal has threatened their relationship with China.
Why attempts to devalue the currency will fall short:
Admirable Economic Growth:
New Zealand’s economy has undergone growth for 10 consecutive quarters and is predicted to achieve 2.5% economic expansion in 2013. Next year, economic forecasts are predicting a 3.5% GDP growth. According to the Organisation for Economic Cooperation and Development, New Zealand is set to become one of the fastest-growing economies in the developed world.
The high economic expansion will have a positive association on their unemployment statistics. Admittedly, for a country with only 4.5 million people, the 6.6% unemployment rate is surprisingly high. However, the economic emergence will surely reduce unemployment and appreciate the value of the Kiwi.
Retail is now showing improvement, a sector that was previously sluggish. Architecture and engineering are also showing signs of emergence, examplifying diversification for an economy previously monopolised by farming exports.
Construction is on the rise. This will help create employment and rebuild a country which was regrettably devastated by a fatal earthquake a few years ago.
Continued Business Confidence and Investment:
Business investment is growing in a controlled manner. This will provide a platform for sectors such as construction to carry on developing, providing future employment opportunities.
Internal business confidence is also evolving. This will result in more money being pumped into the New Zealand economy. Both of these factors should collaborate towards supporting the economy's growth.
A Rapidly Growing Housing Market:
Although there are concerns that the New Zealand housing economy is spiralling out of control, the housing economy is growing at an impressive rate. The value of homes increased by 8.5% from August 2012 to August 2013.
There were serious concerns that the house prices rocketing could be overpricing consumers, however the price does not seem to be deterring potential buyers. Sales of homes increased by 8.5% this year, the exact same amount at which the house price expanded.
In fact, the knowledge of a forthcoming interest rate adjustment will not only hopefully prevent a housing crisis, but provide the Kiwi with an increase in value.
In comparison to their neighbours, Australia, the New Zealand economy is in a far healthier position. Both countries fear their currencies being overvalued would thus hurt their export competitiveness.
The Australian government is looking to devalue their currency, by decreasing their interest rates. While on the other side, New Zealand is undergoing commendable growth and are set to increase their lending rates in the near future.
In my opinion, this makes it more appealing to go ‘long’ on the Kiwi than to buy into the Aussie.
In conclusion, although the RBNZ may prefer to deteriorate the momentum of their currency, there are strong signals that the New Zealand economy is heading towards a bright future. With so much uncertainty with other economies around the world, New Zealand could well prove to be an economy that is moving upwards, and potentially become a player in the future.
Wild fluctuation is evident in the AUDUSD and EURUSD currency pairs, the NZDUSD provides an attractive alternative.
Written by Jameel Ahmad, Research Analyst at Blackwell Global.
Follow Jameel on Twitter @JameelAhmadFX
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