Daily Market Report for 7 May 2014: Fundamentals vs. Policymakers’ Rhetoric
Economic Insights
RBNZ Wheeler may prepare to intervene the currency market
New Zealand has been enjoying a economic recovery with a solid momentum in the past months, and just reporting a solid labor market report this morning. However, Kiwi became the worst performer among the G10 currencies, fuelled by the RBNZ Wheeler’s speech on possible intervention.
New Zealand employers added more manpower in the 1Q this year, more than the earlier analysts estimate. Besides that, increasing people joined the workforce again, as the participating rate rebounded. The participation rate rose to 69.3 percent from 68.9 percent in the fourth quarter, reaching the all time high.
New Zealand labor market participating rate
Source: Bloomberg
Employment change increased 0.9 percent, by 22,000 jobs added. The jobless rate was unchanged at 6 percent, even with the participating rate improved. Under this perspective, this type of trend even shows more healthy signs than the labor market in the United States, sending the message to the market that the recovery of the labor market in New Zealand sets to be sustainable. According to the official data, the increase of the manpower was mainly from retail hospitality and construction sectors. Economists forecast 68.9 percent.
But Wheeler’s speech made Kiwi become the worst performer among the G10 currencies today. Wheeler said the bank may be more prepared to sell the nation’s currency if the exchange rate fails to respond to a continued weakening of export prices, it would become more opportune for the Reserve Bank to intervene in the currency market to sell New Zealand dollars.
Shall we care? Yes and No. Based on those previous rhetoric from the RBNZ, the effect usually not sustainable. Even now, higher inflation and improving labor market further support the RBNZ to hike the rate for another 3-4 times in 2014. It will be positive for the Kiwi. If we stick to this perspective, we may ignore the Wheeler’s speech today, and it might even be an opportunity for investors to pick up the kiwi at a better price.
On the other hand, factors to curb the Kiwi rally are also seen nowadays. Its exchange rate could be expected to weaken if the U.S. economy continues to improve after a bad 1Q due to the weather effect. Its dairy prices has been lowered by 13.57% since the peak level in Feb this year.
New Zealand Dairy price index
Source: Bloomberg
All in all, we think the chance for a real intervention in the currency market is very low. But Wheeler’s speech today has lowered the chance for the RBNZ to hike the rate by another 25 bps in June’s meeting. Short term rhetoric from the policymaker is unlikely to press the Kiwi lower in a longer period, unless the RBNZ changes its rates normalization regime to be adjusted, but the inflation and rising housing market prices not allowing the central bank to do so.