The new development inside New Zealand is the June 2016 reintroduction of the 1 year yield from its December 2014 absence. From June 1987, NZD’s 1 year yield was a mainstay financial instrument but since the 2008 crisis, the 1 year yield was offered then rescinded many times. Last time the 1 year yield was offered was October 2013 then rescinded December 2014. The 1 year yield was offered April 2009 then rescinded August 2010, offered November 2012 then extricated 2013. The life span from introductions to end dates since 1987 is about 1 year and serves as its purpose to complement the RBNZ’s most vital component in the current 0.51 Swap Rate Spread Close. Since 2008, the Swap Rate Spread Close trended about 50 basis points from the low 0.30’s to upper 0.80’s.
Why the current introduction is to complement the wholesale changes underway in all central banks to streamline and control interest rate channels. Fortunately for New Zealand, its a pure capitalist system based on open and trade able markets.
New Zealand GDP last at Q1 2016 was 2.4, Q4 2015 was 2.5, Q3 2015 was 3.0, Q2 2015 was 3.3 and 3.6 in Q1 2015. Overall GDP is not only in extraordinarily good shape but current GDP is middle range. Middle range means GDP for the next 2 quarters will travel in the 2.4 vicinity.
CPI last at 0.4 in Q2 2016 matches 0.4 in Q1 2016 then 0.1 in Q4 2015, 0.4 in Q3 2015, and 0.3 Q1 2015. For the most part and common to all central banks is the negative correlations from CPI to GDP. Lower CPI generally sees higher GDP. New Zealand held steady in CPI over 2 years.
NZD in the Real Trade Weight Index made of 14 nation’s exchange rate, mostly Asia, trended since middle 2015 from current 71.58 to 2015 lows at 70.40 and 70.77.
Current NZD/USD Vs its major exchange rates are running on all cylinders as Correlations to NZD/CAD run +92%, NZD/CHF +99%, NZD/EUR 98% but negative 95 to NZD/JPY. NZD/CAD is most vital as its risk determination factor.
Massive supports held NZD/USD over many weeks in the 0.6900’s and explains the current rise to 0.7200’s. The current supports are located at 0.7118, 0.7051 and 0.7002. All are currently driving NZD and all must break to see NZD lower.
Intraday big breaks are located at 0.7240 then 0.7245, 0.7251, 0.7364 and 0.7271 top target. The next big break points are located at 0.7350 and today’s bottom at 0.7167.
NZD/CAD at 0.9443 must break 0.9223 and 0.9053. NZD/CHF must break 0.6894 and 0.6829 while NZD/JPY faces 74.29 and 74.12 V 73.95 and 73.17.
From an economic perspective, the RBNZ lacks any reason to touch OCR nor does the market metrics followed reveal a lowering of OCR. The only reason to lower would be found to lower the exchange rates as Dairy Exports remain seriously challenged and current production trades below break even rates. Lower OCR to lower NZD would be positive to NZD exports especially in NZD/EUR as the largest Dairy market. NZD/USD and NZD/EUR will see the biggest moves.
Brian Twomey, Inside the Currency Market, btwomey.com