WELLINGTON: Expect further NZD strength say analysts at Westpac Bank who cite the economy’s continued solid performance as a reason to expect further gains.
Expectations for further strength come as we observe the New Zealand Dollar is at its highest level in nearly two years when considered on a trade-weighted basis. When talking about a currency from a trade-weighted perspective we refer to it’s overall performance against the currencies of its main trade partners. Therefore, this is a form of currency basket.
Importantly, it does tell us that the currency is probably uncomfortably expensive for policy makers who would observe New Zealand exports will suffer as a result. It also has the side-effect of keeping New Zealand imports cheap, which in turn ensures inflation should remain low. Much of the strength in the trade-weighted NZD can be attributed to the currency’s recent good form against the US Dollar.
The NZD/USD has risen from around 69 cents at the end of December to above 72 cents, which is just shy of the level that prevailed prior to the US election.
“After the US election in November the market’s initial assessment was that Trump would boost the US economy through spending on infrastructure and tax cuts, and that would strengthen the US Dollar against other currencies. But markets are now back-pedalling on that assessment a little,” say Westpac in a client briefing.
The strengthening NZD is predicted to place renewed downward pressure on imported goods prices over the coming year.
