Here's our weekly currencies outlook and review with HiFX's Senior Dealer Dan Bell.
The combination of a hawkish Reserve Bank of New Zealand and potential for a new round of stimulus for the United States economy from the US Federal Reserve next week could see the New Zealand dollar push even higher from where it's currently at.
With the Reserve Bank making it clear its focus under new Governor Graeme Wheeler is very much on targeting the 2% mid-point of its inflation band, the New Zealand dollar rose to a one year high of 74.4 on a Trade Weighted Index (TWI) basis after the central bank left the Official Cash Rate unchanged at 2.5% on Thursday. That left the TWI just 1% below its post-float high of 75.19. The Kiwi also rose to US$83.49 cents.
Bell notes the TWI at that level is not far below where the Reserve Bank, under previous Governor Alan Bollard, intervened to try and weaken the Kiwi in 2007.
"On Thursday there was a clear focus from the Reserve Bank on inflation," he says.
"Some analysts had expected the Governor to talk about the high currency and the impact that was having on the economy, and also to reference some of the weaker economic data that we've had over the last quarter or so. But there was a real focus on inflation and the Governor sees inflation picking up in New Zealand next year referencing the Christchurch rebuild and also looking at the property market in general."
Odds now on an OCR hike
Bell says Wheeler's hawkish inflation focused comments grabbed the attention, raising the possibility of an increase to the OCR as soon as next year, whereas the market has been anticipating the next OCR move to be down.
"He (Wheeler) is showing the market that he's more of a hawk at the moment. And on that basis being focused on inflation the market is seeing that as positive for the New Zealand dollar, because it does mean that there will be more likelihood that he will raise interest rates perhaps earlier than some were expecting," says Bell.
"And we've already seen that in the interest rate market, we've already seen the market reduce the potential for a rate cut for New Zealand next year. And I think the odds are certainly on a rate hike towards the end of next year (or) the start of the year after that."
None of this would be welcomed by the export sector.
"The New Zealand dollar up over US83c at a time when our terms of trade are at three year lows, and the currency's a part of that, but we're not seeing a lot of positive news from the exporters at the moment. So at this time I think it's going to be difficult for the economy to gather any real positive momentum if the currency keeps going up."
Could NZ's credit ratings come under threat?
Bell suggests if the New Zealand dollar continues rising, and there's a "perfect storm" next year with property prices continuing to rise and the country's current account deficit continuing to worsen, the credit ratings agencies might look at cutting New Zealand's sovereign ratings.
"If our current account gets worse next year because we keep sucking in capital from offshore to fund this property market, then I think the offshore credit rating agencies will start thinking 'hey, maybe the New Zealand story isn't quite as compelling as it was'."
New Zealand currently has sovereign foreign currency credit ratings of Aaa with a stable outlook from Moody's, and AA from both Standard & Poor's and Fitch, both also with stable outlooks. New Zealand has domestic currency credit ratings of Aaa with a stable outlook from Moody's, and AA+ from both Standard & Poor's and Fitch, both with stable outlooks.
The country's latest current account figures show a NZ$718 million deficit in October. This was NZ$268 million above the consensus deficit forecast by economists and way ahead of the NZ$226 million deficit recorded in October last year. BNZ economists now forecast the deficit will widen to 5.5% of Gross Domestic Product in calendar year 2012, from 4.9% in the year to June 2012, and expect it to "pierce through 6%" during 2013.
Meanwhile, tonight, New Zealand time, US jobs data - non-farm payrolls - is expected to show the world's biggest economy created about 90,000 new jobs in November leaving the unemployment rate unchanged at 7.9%. However, Bell notes Hurricane Sandy is expected to have an impact, meaning people may not read as much into the report as they normally do.
Will the US Fed keep twisting?
Next week all eyes will be on the Federal Reserve's Federal Open Market Committee (FOMC) meeting with the announcement due out Thursday New Zealand time.
"The focus will be on any reference to additional bond purchases, particularly around US treasuries," says Bell. Operation Twist (a stimulus programme where the Fed is buying US$400 billion worth of long-term treasury securities) will come to an end soon (from the end of the year) and the market is anticipating whether or not the US Federal Reserve will start targeting US treasuries again."
"We know they've started targeting the mortgage backed securities market, the QE3+ ( the Fed's third round of quantitative easing, or money printing) that we had a couple of months ago. So whether or not they start targeting US treasuries again may well be revealed next week," Bell adds.
"Obviously that will be negative for the US dollar because it means again the Federal Reserve is prepared to expand their balance sheet and print more money. So (it's) another factor that could potentially give the New Zealand dollar more upside against the US dollar."
Bell also notes that towards the end of the calendar year some portfolio managers like to "park a bit of money" over the holiday season in high yielding currencies like the Kiwi and Aussie dollars.
"And from a seasonal, exporter point of view you tend to see a bit of activity around this time of year as exporters lock in cover (hedging) for next year, not that they'd be liking the current levels in the New Zealand dollar, but they may well be forced to start doing something with their exposures."
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Dan Bell is the Senior Dealer at HiFX, a UK-headquartered foreign exchange dealer with significant operations in Australia and New Zealand. It has a dealing room in Auckland. See more detail here.