13 February 2012

The NZD Can't Escape "Risk On-Risk Off", Says HSBC

The NZD continues to be one of the currencies most strongly correlated with the “risk on-risk off” (RORO) factor, leaving economic fundamentals playing second fiddle. When the market’s view is positive, the NZD performs well, and when the news flow turns negative, it sells off, according to the latest Currency Outlook issued by HSBC.

Considering the high volatility in NZD-USD observed in recent months, December was a relatively stable month for the pair.

Trevor Pye, Head of Global Markets, at HSBC New Zealand says: “The economic outlook for New Zealand looks relatively solid in comparison with other developed economies. Growth was solid in Q3, up 0.8% q-o-q, strongly supported by the 80,000 extra visitors who came to New Zealand for the Rugby World Cup. Business confidence appears to have stabilised at moderately positive levels, which supports the view that recovery is continuing even as global concerns increase. The rebuilding of Canterbury has not yet hit full stride, and should support growth going forward.”

“However, slowing growth in New Zealand’s main trading partners, lower commodity prices as a result of the weakening global situation, and higher local bank funding costs putting pressure on borrowing rates, are all factors which could dampen growth,” he continues.

As expected, the RBNZ kept the OCR on hold at 2.50% in its January meeting. The central bank has been unable to lift the OCR from what they were referring to as “emergency levels” put in place after the Canterbury earthquake in February. The RBNZ has now dropped the phrasing “emergency levels”, implying that this low rate may be held for some time yet. We believe that the strong global risks and the Eurozone crisis’ impact on growth in Asia will keep the RBNZ on hold for longer than previously expected.

Paul Bloxham, Chief Economist, HSBC New Zealand says: “We might seamlessly have moved from one emergency to the next, and these historic lows may be the ‘new normal’, at least for a while.”

“The outlook for the New Zealand economy looks relatively good, but as long as the RORO paradigm remains the dominant force in the market, global stresses will push the NZD lower,” concludes Pye.

The full report can be found here.

ENDS

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