Published: November 29th, 2023
The New Zealand Dollar (NZD) is the best-performing major currency going into this week’s trading session thanks to positive global market conditions, new measures by China to prod the country’s economy, and upbeat retail sales numbers.
A market analysis from Crédit Agricole’s Currency Strategy Unit says rising New Zealand retail sales have made the Kiwi the outperforming G10 currency this month.
Figures from Stats NZ show that Q3 retail sales volumes hit zero per cent quarter-on-quarter, much higher than the negative -0.8 per cent consensus was looking for and sharply up from Q2's negative -0.9 per cent.
The numbers provide some hope that the GDP print due for publication on 14th December 14 will come in above expectations, likely giving NZD another boost.
But the bank also points to global drivers as key to the Kiwi's upward momentum, given that November is also shaping up to be the best month of the year for global stock markets.
Upbeat investor sentiment tends to be supportive of the New Zealand Dollar and has helped it advance against all G10 peers except the Swedish Krona over the past thirty days.
The Kiwi has extended its short-term strength thanks to good news out of China, where Beijing has announced fresh measures to boost the domestic property sector.
‘In addition to signs that disinflation is taking hold globally, China has added to prevailing market optimism by announcing a robust support plan designed to aid the country’s property developers,’ says Crédit Agricole.
Beijing said last week that it will allow Chinese banks to offer unsecured short-term loans to qualified developers. As New Zealand's biggest customer for commodity exports, Chinese economic news can be a support or drag on the Kiwi. In fact, NZD is often considered a liquid proxy for exposure to China.
But the bank does caution that it might be too soon to sound the all-clear for Chinese economic growth, and by extension, the New Zealand Dollar.
‘While real estate sector support looks positive on paper, it does suggest Beijing is worried about a potential crisis brewing.’
Analysts were less bullish back in March when NZD held its own among the G10 majors and rallied past a new technical milestone. Despite the uptrend some said the risk of a downside correction was also on the rise.
NZD was slightly behind its commodity-currency cousins the Norwegian Krone and Australian dollar at the end of the month but rose against all other majors in a rally that chipped away at two significant levels of technical chart resistance.
NZD/USD overturned more than half its decline from July 2022 in late March. In a note to investors, Australian investment bank Westpac said that NZD’s next moves to watch would be against the greenback. ‘As commodity prices rise further and continue to support the New Zealand Dollar, we believe 0.7100-plus could be achievable by July.’
The Kiwi had already been performing well before American exchange rates dipped lower and gave it an added tailwind against the US Dollar, added Westpac analysts. Gains in agricultural commodity prices also provided a lift.
‘The next moves for NZD will hinge on geopolitical events. Higher prices for commodity exports and high outright yields will stay as essential NZD supports.’
Agricultural commodity prices rose shsarply in 2022, driven by sanctions against Russia for its invasion of Ukraine and previous supply chain disruptions caused by the long COVID-19 pandemic. The Kiwi saw gains against that backdrop, while also benefiting from central bank interest rate policy.
The Reserve Bank of New Zealand’s (RBNZ) said in February 2022 that it expected to raise its interest rate even further than previously planned in order to cap domestic inflation pressures throughout the year. That led many economists to raise forecasts for the country’s official cash rate.
Some local analysts, however, were more reserved about New Zealand’s economic growth prospects and believed there was potential for the US Dollar to rise further in the near term.
Currency strategists at ANZ said in a research note that the outlook for NZD was ‘somewhat clouded due to a number of factors including a housing slowdown, higher-than-expected interest rates and unpredictable commodity prices. Focusing on inflation, indications point to potentially much higher real rates. That includes America, where inflation is highest.’
‘Looking at previous historic situations where these factors were dominant, it's possible that the long USD rally may yet have a way to go’.
ANZ said previous parallels were especially relevant for the New Zealand Dollar given its recent outperformance and given that it has often been sensitive to shifts in US bond yields triggered by monetary policy at the US Fed.
'Forex traders may see current levels as an effective way to create defensive long-USD positions, particularly against European currencies. Markets are pricing in Federal Reserve rate hikes of around 100bp at the next two meetings, which may favour the Dollar.’
Both NZD and AUD continued to benefit from their geographic distance from the Ukraine conflict in 2022, and from higher global commodity prices, ANZ analysts added.
The Greenback was popular with speculative traders through its nine-month rally leading up to March 2022. Remarks from UD Fed Chairman Jerome Powell and other policymakers at the time suggested America’s central bank might raise its interest rates more rapidly than suggested by Federal Open Market Committee (FOMC) members’ forecasts.
Despite that backdrop, the New Zealand Dollar was forecast to hang on to its dominant 2022 position in global currency markets, supported by speculation that China's economy would continue to expand to the benefit of New Zealand.
NZD had been trending higher against all G10 peers since Russia’s action against Ukraine began. With signs of peace nowhere in sight, analysts expected the trend would extend.
