Central Bank action and inflation continues to dominate market moves this year, with the Ukraine War raging on in the background hitting currencies hard.
The New Zealand dollar has earned the spot of the second-to-worst performer in 2023 so far, ahead of the Japanese yen, whereas the US dollar has been the strongest performer.
As predicted, the RBNZ raised their interest rate 50 basis points from 4.25% to 4.75% recently but defied expectations of a signal for a lower peak. In line with recent weather events, there’s still room to move higher than the 5.5% initial top with policy guidance still required at the current pace. At 5.5% this would make it one of the highest interest rates in the developed world. With cyclone Gabrielle destroying large parts of North Island, the battle with inflation just got tougher for the RBNZ with billions of dollars said to be needed to rebuild infrastructure and homes. Inflation currently stands at 7.2% for the fourth quarter of 2022, way to high.
New Zealand retail sales fell 0.6% for the quarter ending December which represents downside risks to fourth quarter overall growth (GDP), due for release on 16 March; the RBNZ need to see a decent cooling before they think inflation will ease. Recent US inflation ticked slightly lower from 6.5% y/y to 6.4% y/y as predicted, this will most likely keep the Federal Reserve on schedule to raise rates in the coming months; the next release is due 23 March.
As the RBNZ hikes their interest rate, more so than it’s playing partners, we would expect to see the NZD buoyant over the medium term across most main currencies.
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