RBNZ is cautious despite surging exports - Rabobank

Jane Foley, Senior FX Strategist at Rabobank, notes that the RBNZ has been maintaining a cautious policy outlook in spite of the surging exports.

Key Quotes

“In April, the view from the RBNZ that “numerous uncertainties remain and policy may need to adjust accordingly” was at odds with the more hawkish views of many commentators which were drawn from the decent domestic economic backdrop.  April export data subsequently registered a two year high, driven by a 15% y/y surge in goods to China.  According to Fonterra, in the 12 months to February, China’s total dairy imports rose 14% compared with the same period the previous year.  While milk prices are still below their peaks three years ago, relative to Australian the New Zealand economy is benefitting from the type of products that it is exporting.”

“In February 2017, China released its first “No 1 Central Document” policy statement of the year.  As has been the case for the past 15 years, this focused on the agricultural sector.  According to Reuters there was a change in bias from Beijing.  Rather than focus on self-sufficiency in food the Chinese authorities have prioritised the need to meet increasingly sophisticated consumer demand from its urbanising population.  This includes a rebalancing in food from basic grains towards meat, dairy and other higher-value products and an acknowledgement of the need for higher imports along with an expansion of domestic production.  Led by a rebound in milk powder, butter and cheese New Zealand export prices rose 8% q/q in the 3 months to March.  On the back of this recovery in dairy prices, and subdued import prices, New Zealand’s terms of trade have reached their strongest levels since 1973.  This improvement should feed through into household incomes and economic growth.”

“We expect AUD/USD to slip towards 0.73 by year end.  While the cautious sentiments of the RBNZ and broad concerns about Chinese growth may limit upside potential for the NZD vs. the USD, we see downside potential for AUD/NZD towards the year’s low near the 1.0326 area initially.  On a break below the September 2016 low at 1.0238 is likely to attract.”