NZD/USD Fundamental Forecast – September 12, 2016

The NZD/USD continued to gain adding 3 points to 0.7402 as the US dollar took another hit this morning falling 19 points to 94.85. The kiwi gains were limited by disappointing consumer inflation data from China. Consumer inflation has remained well below China’s official target of around 3 percent in 2016, despite concerns that severe summer flooding, which has disrupted public infrastructure and agricultural production, would ramp up inflationary pressures.

Food prices were up 1.3 percent in August, compared with a 3.3 percent year-on-year gain in the previous month. Prices of pork, China’s staple meat, rose only 6.4 percent versus a 16.1 percent increase in July.

Importantly, non-food prices showed headline inflation remained stable, rising 1.4 percent, unchanged from July. The Statistics bureau data showed a 4.3 percent year-on-year increase in healthcare costs and a 4.5 percent rise in “other goods and services” were the main drivers.

The producer price index (PPI) dropped 0.8 percent in August from a year earlier, the slowest pace of decline since April 2012. China factory prices have been falling since March 2012, but a turning point could be on the horizon as the industrial sector improves on the back of a housing recovery, and commodity prices bounce globally.

Analysts expect factory prices to turn positive by the end of the year, which will give a much-needed boost to earnings in the industrial sector and help ease pressures from debt obligations. “Today’s PPI data mirrors the improvement in industrial profitability,” said ANZ analyst Raymond Yeung in a note to clients.

The New Zealand dollar has hit its highest levels since May last year against the US dollar and the trade weighted basket of currencies which the Reserve Bank watches. So far this year the currency is up about nine percent.

And it is a similar story with the local share market, which has gained nearly 20 percent, driven by low interest rates which is driving investors to look for better returns.

Derek Rankin, who heads the foreign exchange advisory firm, Rankin Treasury, said New Zealand’s currency and other investment assets were being driven by a global demand for safety and yield. He said he did not see that ending any time soon.

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 September 12, 2016

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