Focus on the kiwi

Shifting over to New Zealand and the kiwi, bullish interest-rate differential, overall weakness in the U.S. dollar, and yen carry trade action are the major factors propelling that currency to historic highs. Looking at the economic picture, Moody’s Economy.com forecasts a 2007 GDP growth of 2.4; Westpac Institutional Bank forecasts a 2.5-percent growth. “Economic growth will be driven by New Zealand’s domestic economy,” says Glenn Levine, economist at Moody’s Economy.com.

“Business confidence has picked up and consumers are once again spending on the back of renewed confidence and a buoyant housing market. The outlook on the external front is not so upbeat, with the stronger currency and slowing U.S. growth weighing on New Zealand’s export performance.” Inflation in New Zealand remains high. Levine says rising wages and robust consumer demand are two factors underpinning inflation.

“The housing market remains really strong,” says Thomson IFR’s Staskow. “And, immigration is fueling demand for housing, which is another factor driving up housing prices.” The latest New Zealand CPI data, released in mid-April, revealed consumer prices had slowed to an annual rate of 2.5 percent in the first quarter, down from 2.6 percent in December 2006. However, core inflation remained high at 3.2-percent yearover- year.

Inflation concerns triggered another round of tightening by the Reserve Bank of New Zealand (RBNZ) at its April 26 meeting. The central bank hiked the cash rate 25 basis points to 7.75 percent. Most market watchers now expect the RBNZ to shift into a holding pattern, with 7.75 percent potentially marking the top of this current tightening cycle. The bank meets next on June 7, but steady monetary policy is expected out of that confab.