Kiwi dollar backed by dairy poultry amp RBNZ

Three weeks remain until the next interest rate decision of the Reserve Bank of New Zealand, which is widely expected to produce a 25-bp hike to 0.75%, the first tightening since June 2010. Will the kiwi get a fresh boost or is any action priced in?

The Bank left rates unchanged last month, disappointing some market participants who had expected the central bank to follow on its hawkish remarks in December. The emerging market volatility prevailing at the time may have been a reason for the RBNZ to stand pat, but even the Fed’s decision to taper earlier that day did not encourage the RBNZ to take action. The kiwi fell 1.5% to 0.8050s before resuming a climb of more than 4% to 0.8393.

Last month, RBNZ governor Wheeler said late last month that bank will begin adjusting lending rates to “more normal levels” soon. The Cash rate has remained unchanged at 2.50% for 3 years, the longest period of no change in rates.  The fundamentals continue to improve unambiguously.

Confidence at 7-year highs

Consumer confidence slipped 2.1% in February after rising 4.9% the prior month to hit the highest in 7 years.  Details of the survey indicate expectations for prices to grow 3.5% annually in the next two years, up from 3.3% in the January survey. House price expectations slipped to 4% from 4.2% in January.

On the jobs front, New Zealand’s unemployment rate is at a 4–year low of 6%, employment growth stood at 1.1% in Q4, just below the 4-year high of 1.2% attained in Q3.

Milk, meat & poultry

On the upside, meat product input prices rose 1.9%, owing to higher prices of sheep and lamb. This has lifted the prices index for export logs 4.3%, or 23% for all of 2013, the highest in 3 years.

Meanwhile, exports of milk powder and butter, New Zealand’s biggest export, soared to NZ 1.9 bln, up 12% in December, 13% in November and 66% in October.

These figures offset this week’s release of Q4 PPI, which showed input prices falling 0.7% q/q from 2.2% while PPI output fell 0.4% from 2.4%. The decline was attributed to falling electricity and gas prices typical of lower summer demand. Demand for energy has been tepid in December each year since 2006.

Right shoulder & moving average confluence

Apart from Kiwi’s exceptional feature of being the only major currency whose central bank is set to raise rates, the buying-on-the dips appears to be a constant positive force in each bout of selloff emerging from hawkish Fed rhetoric, emerging market woes or fresh doubts from China. These dynamics have manifested themselves in the wide price consolidation of the past 5 months, which are part of the shoulder in the reverse Head-&-Shoulder formation. The extended shoulder appears to be supported by the confluence of 55 and 100 WMAs. A run-up towards 0.8380-0.8420 remains in the cards, and if the Fed does taper on March 19, then any resulting pullback in NZD would likely draw another fresh buying on the dips ahead of the RBNZ one week later.