March 2017

New Zealand Update

The latest dairy auction saw prices decrease by 6.3%; the second decline in a row.

Fonterra’s payout forecast for the season 16/17 of $6.00/KgMS is holding firm. This decline is not yet putting the payout forecast under too much pressure.

New Zealand’s terms of trade rose 5.7% in the fourth quarter of 2016. Export prices rose 5.7% and import prices rose 0.1%. Dairy led the increase.

The NZ commodity price index rose in February up 0.2% and 20.9% on an annual basis.

New Zealand Dollar/Interest Rates

New Zealand Dollar

NZD/USD is currently trading at .6920. NZDTWI is currently marked at 76.10. NZD/USD is essentially unchanged verses 3 months ago, although the pairing did spend some time during the quarter at much higher levels. NZD/TWI is, on the other hand, some 2% lower at 76.10. And again, USD strength has been the theme. The US Federal Reserve is expected to raise interest rates at the March meeting and signal further hikes are to come through 2017. US Federal Reserve action, together with a healthy US labour market is going to support USD over the remainder of the year. This, in combination with weaker commodity prices (dairy in particular), and a New Zealand central bank sitting on its hands, is likely to result in USD/NZD and NZD/TWI moving lower over coming months.

New Zealand Interest Rates

NZD cash rate is 1.75%. The NZ 10yr bond rate is 3.35%. RBNZ have signaled they are on hold for the remainder of 2017. History suggests they will hold the line, even if the data suggests otherwise, and all evidence points to higher inflation in New Zealand sooner rather than later. Should that be the case, we expect bonds rates to move significantly higher in yield, the yield curve to steepen, and financial conditions to tighten further.

Of late the rise in the 10 year bond rate in New Zealand has been driven largely by moves in offshore bond markets. This dynamic will be ever present, but the inflation picture domestically has changed in recent months and will be a factor in driving higher bond yields in New Zealand over 2017.   NZ 10yr rates are currently trading + 160bps to cash. We may see this spread move out to +200bps/+225bps in the months ahead.

Reading the Charts

The NZD moved higher over the last quarter against all currencies. The strength vs the pound continued in the post Brexit result environment.

US

Last updated 10/03/17, Source: Reserve Bank of New Zealand, Reuters, NZFMA

As in our last update, the NZ economy remains in good shape although the Auckland residential housing market has shown indications of peaking. The dairy price recovery is positive but patchy in terms of its impact.

Euro

Last updated 10/03/17, Source: Reserve Bank of New Zealand, Reuters, NZFMA

As usual the global market will continue to influence the movement of the NZD with yield and economic performance supporting NZD strength. The USD post the election has been noticeably stronger and this appears likely to continue.

UK

Last updated 10/03/17,  Source: Reserve Bank of New Zealand, Reuters, NZFMA

The most likely move from a chart point of view is for downside in the next quarter even if is only a corrective phase.