Published: October 18th, 2023
The New Zealand Dollar (NZD) began the week on a softer footing following publication of quarterly inflation figures. The rate of price rises was less than consensus expected, reducing the likelihood of another rate rise by the Reserve Bank of New Zealand (RBNZ) before year’s end.
A note to investors from Westpac's forex strategy unit said ‘we’re no longer looking for RBNZ policymakers to raise the interest rate at November’s Monetary Policy meeting. The central bank has suggested the bar is set high for any further tightening this year and the CPI undershoot in Q3 supports that stance.’
Data from Stats NZ showed that New Zealand's consumer price index (CPI) inflation rose by 5.5 per cent in the 12 months to the end of September 2023.
Markets were looking for a rise of 5.8 per cent, down from 6.0 per cent seen at the end of Q2 2023. Inflation rose by 1.8 per cent on a quarter-on-quarter basis, which was also under the 2.0 per cent consensus was looking for.
The impact on NZD was notable, with the Kiwi coming under pressure against all its G10 peers.
The New Zealand Dollar also felt pressure through July and August 2023 as forex traders perceived that hopes of further rate hikes this year were receding. NZD recovered lost ground in September and October, especially when paired against EUR and GBP.
Westpac said the high hurdle set by the RBNZ for another interest rate shift before 2024 meant that an upside surprise to CPI would have been needed to prod the central bank into making another near-term rate hike.
In September 2023, The Kiwi was set for gains against GBP and other G10 peers thanks to better-than-anticipated data out of China. The figures have warmed investor sentiment towards the world's second biggest economy, which has often underwhelmed in the aftermath of COVID-19.
The Pound started September with a corrective pullback against NZD, however analysts said the imminent Bank of England (BoE) rate decision and future data releases out of Canberra would open the door to two-way volatility.
By September 8th the Pound to New Zealand Dollar rate (GBP/NZD) had fallen back a full three per cent from multi-year highs reached in August.
China's lukewarm recovery has weighed on the Kiwi at various points this year thanks to New Zealand's reliance on exports to the country, particularly agricultural commodities. Against that backdrop, evidence that the worst of the Chinese COVID slowdown is over, could lift sentiment towards NZD.
'Last month’s economic print suggests stability is returning to China’s economy, especially in the manufacturing and retail sectors where revenues look to have bottomed out. Our projections for Chinese GDP this year have been revised upward to 5.2 per cent from 4.9 per cent, while next year is projected to see growth of 4.3 per cent,’ said analysts at ANZ’s FX Strategy Unit in a note to investors.
Forex traders had been looking to New Zealand’s Q2 GDP figures in hopes of growth in the range of 0.4 per cent, which would have indicated that the mild recession seen in Q1 came to an end as Spring flowed into Summer.
‘We’re watching for an end to the weak growth seen in the first half of the year and a rebound in output of around 0.6 per cent,’ added ANZ at the time.
The Kiwi’s relative value against other G10 currencies is often impacted by the data from Beijing. In November 2022 NZD began the month on the back foot as a selloff of Asian and antipodean currencies exposed to events in China gathered steam.
NZD had been in a period of outperformance in Autumn 2022 that saw it hold its ground against G10 peers like GBP. But as month-end drew nearer both the New Zealand and Australian Dollars (AUD) were on weaker ground as forex traders sought shelter from potential economic turmoil in China. The country had been rocked by protests against Beijing’s continuing ‘zero covid’ policy, and the latest restrictions on movement.
Société Générale’s forex strategy unity wrote that the protests had ‘cooled some of the optimism around the end of lockdowns and hit risk-sensitive fiats everywhere.’
Images from protests across China were being widely shared on social media and continued through to mid-November amid signs that more strict lockdowns were looming. Markets were notably unaccustomed to scenes of protest in a society that outsiders assume to be authoritarian and rule-abiding.
A report in the Wall Street Journal said the situation in China had ‘jolted Asia-Pacific investors, as worries mount that the protests could hamper growth in the world's second-largest economy’.
Chinese equities went lower on 29th November, with Hong Kong's Hang Seng Index down a full percentage point. The onshore yuan was weaker against the dollar by 0.5 per cent, having sunk more than one per cent at the open, the biggest 24-hour drop since April.
Société Générale added that ‘NZD was hit by fears about domestic upheaval in China sent investors looking for safety. There are worries that Beijing’s unyielding zero-Covid policy might darken the outlook for growth down under.
Anti-lockdown protests kicked off after a deadly fire in Xinjiang on 23rd November. Some residents died after being trapped in the residential complex by harsh Covid restrictions.
Given the light economic and event calendar this week, NZD was subject to the news cycle and broader investor sentiment.
New Zealand is a small market heavily dependent on commodity exports and China is its biggest customer. Shifts in demand can heavily affect the country’s overall economic performance and financial flows.
The ebb and flow of Chinese demand remains a crucial driver of economic fortunes down under, as it is the primary destination for New Zealand and Australian exports. If China's economy starts to slow down, it could negatively affect Auckland's own growth forecasts.