NZD: Riding on strong growth momentum – SocGen

Alvin T. Tan, Research Analyst at Societe Generale, notes that the New Zealand economy is humming along nicely as the manufacturing PMI has been above 55 all of this year, except for a dip to 54.9 in March while the unemployment rate has fallen to a cycle low of 4.9%.

Key Quotes

“Dairy prices have also rallied significantly since August 2015. We expect growth momentum to stay strong through 1H17. The robust economy is attracting record immigration into the country. The combination of falling unemployment, rising immigration and low interest rates continue to buoy the housing market, especially in the Auckland area.”

“Neutral RBNZ but watching currency closely. Although the RBNZ is focused on macroprudential measures to contain the housing boom, rising house prices are making the RBNZ wary of further easing. The expectation of a further inflation pick-up convinced the RBNZ to shift to a neutral setting in November, but a significant appreciation of the currency would jeopardise those expectations. So, the RBNZ would likely lean against a sharp rise in NZD.”

“Growing monetary divergence with US. We expect the growing monetary divergence with the US to weigh on NZD/USD next year. However, we also recognise the fundamental support for the currency and do not see NZD/USD falling much below last year’s lows. Beyond the US dollar, the chief risk to the Kiwi dollar comes from external factors given the currency’s relatively high carry properties and the country’s persistent current account deficit. Moreover, the currency remains overvalued from a long-term perspective.” 

“Relative value in long AUD/NZD. AUD/NZD under 1.05 is offers good value for longer term investors. Rate differentials suggest that the cross should be higher. The recent spike in iron ore prices also suggest that the cross in undervalued.”