December 2016

New Zealand Update

The latest dairy auction saw prices decrease by 0.5% with the key whole milk powder declining by 0.8%.

Fonterra’s recently revised forecast for the season 16/17 of $6.00/KgMS is well up from the opening forecast $4.25/KgMS. This decline in the auction is the first since early October and appears to be something of a consolidation after recent significant increases. The organic forecast is unchanged at $9.20/KgMS.

New Zealand’s terms of trade fell 1.8% in the third quarter. Export prices fell 2.8% and import prices fell 1%. Dairy and meat led the decline whilst the import decline was across a range of categories, offset by the gains in petroleum prices.

The NZ commodity price index rose in November up 2.7%, the seventh rise in as many months. The index is now 13% higher than the same time last year. Dairy prices led the gains up 4.8%. The weakness of the NZD vs USD helped deliver the first annual gain for the NZD Commodity Price Index.

New Zealand Dollar/Interest Rates

New Zealand Dollar

NZD/USD is currently trading at .6925.  NZDTWI is currently marked at 77.45.  NZD/USD is 4% lower than 3 months ago. NZD/TWI is little changed.  This is the result of a much stronger USD which has prevailed since the election of Donald Trump.  That the NZD/TWI is little changed reflects the material improvement in dairy commodity prices over recent months (up some 20%), and the healthy state of the New Zealand economy (GDP currently running at 3.5% +).  Bank of New Zealand currency models show NZD at fair value on both long and short term basis. Technically NZD/USD topped out some months ago at around .7450.  Whilst positive sentiment toward USD persists, we believe downside pressure on NZD/USD will be maintained and any sign of weakness in the broader NZ economy will see NZD/TWI follow. We have seen the highs in the NZD for the time being.

New Zealand Interest Rates

NZD cash rate is 1.75%.  The NZ 10yr bond rate is 3.40%.  RBNZ cut rates in November to new lows on the back of continued low prints in headline inflation.  Headline inflation has likely bottomed for the time being, and the RBNZ is expected to hold rates at current levels through most of 2017.  (Markets are currently pricing rate increases from late 2017).  Technical factors have recently combined in NZ to push funding costs higher for New Zealand borrowers and this pressure is going to persist for the foreseeable future.

The rise in the 10 year bond rate in New Zealand has been driven largely by moves in offshore bond markets and a view domestically that inflation is going to print higher through 2017.  The result has been a much steeper yield curve than we would have expected pre the US election.  If the selloff in 10yr rates around the globe continues, we can expect a repricing of other asset classes to follow in the months to come.  NZ 10yr rates are currently trading + 165bps to cash, substantially outside the range we expected to see only 2 months ago.  New Zealand 10yr bond yields will continue to be captive to moves in the US bond market.

Reading the Charts

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

US

Last updated 16/12/16.  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 remains overheated. The dairy price recovery is helping positive sentiment in the sector and economy as a whole.

Euro

Last updated 16/12/16.  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 16/12/16.  Source: Reserve Bank of New Zealand, Reuters, NZFMA

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