NZD Strength Persists

• Rates cut fail to deter NZD growth


• NZD gains high-yielding status

The latest efforts made by the Reserve Bank of New Zealand (RBNZ) to raise inflation and put a leash on its strengthening currency has been countered by a rebellion, with the surging housing market and a healthy economic advancement actively upholding investor confidence in the economy.

Last week the RBNZ cut interest rates by 25bps to a fresh low of 2%. The 2% yield New Zealand offers is the best in the developed world. Rates in Britain are now 0.25% while they are 1.5% in Australia, near zero in the United States, and negative in Japan and Europe.

This new rate is heavily attractive to investors wanting to make carry trades on the NZD, these trades allow investors to borrow at extremely low rates in currencies like the yen or the GBP and buy high-yielding assets like the NZD.

"Given that volatility is relatively low, liquidity is so abundant and yields are so ridiculously low or negative in some parts of the world, New Zealand just stands out like a sore thumb," said ANZ Senior Economist Philip Borkin.

"If you list all the developed markets' 10-year rates, New Zealand stands out at the top of the list," said Grant Hassell, managing director of AMP Capital New Zealand, an investment manager with more than NZ$20 billion under management.

Since June 2015 this is the sixth time the RBNZ has reduced interest rates. The actions of the Bank has made New Zealand the latest member as the join Australia on a global monetary easing campaign built to eliminate deflation and sustain economic growth. The Reserve Bank of Australia had in the preceding week also slashed their interest rates to new lows.

The failure of the RBNZ’s decision to pacify the growth of the NZD is currently raising fears that a stronger local currency will always weaken inflation and contract exports. The NZD climbed significantly towards the end of the week to settle right under 0.7200. The NZDUSD rose by 1% last week and has soared more than 8% higher in the last 6 months.

The RBNZ has expressed their readiness to further cut rates this year, but the action will most likely fail to dampen the continued strengthening of the high-yielding currency. With just 2 more policy meetings left for the RBNZ this year, the next meeting and rate decision is scheduled for September 22. The persisting growth of the NZD shows that the New Zealand economy had a stellar performance in the first six months of 2016. “Retail sales surged in the second quarter, adding to the view that consumer spending was responding positively to lower interest rates”, stated by Statistics New Zealand last Friday.

In the June quarter retail sales was seen edging almost 3 times higher than the growth rate in the first 3 months as it was reported at 2.3%. This value outpaced forecasts that expected a reading of 1%. Besides automobiles, sales rose by 2.6% far from the previous 1% reported in the previous quarter.

Upcoming fundamental releases for the NZD include the RBNZ Governor Graeme Wheeler’s speech which is due on Tuesday, as data on employment and producer inflation also drop on Wednesday.