The New Zealand dollar continued yesterday to retrace its broad May-June uptrend, falling to a one-month low against the British pound and euro, and to a three-month low against the Canadian dollar.
NZD/GBP, NZD/EUR and NZD/CAD fell to 0.5583, 0.6293 and 0.9305 respectively.
Although the kiwi has fallen across the board in recent weeks, it is unsurprising that it has fallen most against the three aforementioned currencies, each of which has a new hawkish backstory, especially the Canadian dollar which is supported by a central bank that is expected to raise interest rates today (Wednesday July-12, 14:00 GMT).
The New Zealand dollar had been the best performing FX major in May and was second only to the Canadian dollar in June, but unlike the Bank of Canada, Bank of England and European Central Bank, the Reserve Bank of New Zealand appear a long way from raising interest rates. At their last meeting, the RBNZ seemed to retain its neutral monetary policy stance and, according to Citigroup, the bank will not be hiking rates until well into 2018.
This difference in the expectations for upcoming monetary policy changes between New Zealand’s central bank and others was not apparent until recently.
Investors were surprised in June when central banks in Europe and Canada suddenly shifted to a more upbeat, hawkish stance.
Carolyn Wilkins of the Bank of Canada started the trend on June 12th when she told an audience at the Asper School of Business that the BoC’s Governing Council would “be assessing whether the considerable monetary policy stimulus presently in place is still required.”
Wilkins’ comments, which appeared to hint at an upcoming rate hike, marked a significant change in the stance of central bankers in Canada, who earlier in the year were suggesting that rate cuts were still on the table.
Wilkins’ comments were followed by those from ECB President Mario Draghi, who talked up eurozone inflation, from Bank of England Governor Mark Carney, who said that rate hikes remained a possibility in the UK, and also from Bank of Canada Governor Stephen Poloz, whose words cemented market expectations for today’s Canadian rate hike.
If all goes to plan, the Bank of Canada will today become only the second major central bank to enter a tightening cycle, together with the US Federal Reserve who began hiking rates in December 2015.
As has been said many times on BestExchangeRates.com, interest rates trump all else when it comes to driving exchange rate direction. Simply, all the while that the interest paid on euro, sterling and Canadian dollar deposits is likely to increase faster than it will on New Zealand dollar deposits, the New Zealand dollar will look less attractive and its value will depreciate against these other currencies.
Having said that, readers shouldn’t expect too much of a fall in the NZD/CAD exchange rate if the Bank of Canada does go ahead and hike rates today, because most of this hike will already have been priced in. Bear in mind that the Canadian dollar has already appreciated by 4.3% against its New Zealand cousin over the past month.
On the economic calendar for New Zealand, recent weeks have been especially quiet. The next important release for the country comes in the form of next Tuesday’s inflation data. At the end of the first-quarter, consumer prices in New Zealand were rising at an annualized rate of 2.2% – the fastest rate of inflation in more than five years.
Readers can change money into or from New Zealand dollars at exchange rates far better than those available at a typical bank or Bureau de Change by using BestExchangeRates’ online comparison calculators for NZD travel cash and NZD foreign currency transfers.
Author: Joel Wright
You can get in touch with Joel via email here or via the contact page.