The Global Currency Investor A Quarterly Analysis of 50 World ...

Jan 09Jul 09Jan 10Jul 10Jan 11Jul 11Mar 05Nov 05Jul 06Mar 07Nov 07Jul 08Mar 09Nov 09Jul 10Mar 11COUNTRY REPORT: New ZealandOutlook: NeutralS&P Moody's Rates Policy 3m 5y 10y[30-Sep-2011]Rating (LC) AAA Stable Aaa Stable2.50% 2.83% 3.96% 4.42%Economy and Market OutlookThe Reserve Bank of New Zealand (RBNZ) decided to leave its official cash rate unchanged at2.50% at the September meeting and is now likely to keep interest rates at that level for some timegiven concerns about the global environment. Governor Alan Bollard has stated that the centralbank is 'comfortable' with the current policy rate. Q2 GDP data showed the economy growing by1.5% y/y but with growth at a minimal +0.1% in Q2 itself, well below forecasts. Growth wasnegatively impacted by the construction industry which contracted by 4.3%, as well as a drag fromnet exports. These factors should reverse in the second half of the year and start to contribute toGDP once again as the rebuilding of earthquake struck areas gathers pace. The central bankcontinues to believe that the currency is overvalued at current levels as it has tracked the Australiandollar higher but has not had the same terms of trade improvement that Australia has experiencedgiven it‟s soft commodity export sector. Earthquake related issues still cloud the picture for theRBNZ as factors like rising rents due to a short term displacement of families into rentedaccommodation after their homes were destroyed are boosting inflation but will drop out as homesare rebuilt and the demand for rental units falls again. On balance and given the global outlook andhigh level of the currency the RBNZ is very likely to take a pro growth stance and be cautious aboutraising interest rates until well into 2012. We are neutral on the currency based on it's strongcorrelation with the Australian dollar.1.00.90.80.70.60.50.4USD/NZDJPY/NZD1201101009080706050403020.015.010.05.00.0-5.0-10.0-15.0House Prices y/y %2010 2011 (f) 2012 (f)Real Growth (%) 1.7 2.0 3.8CPI (%)* 4.0 0.8 5.0Current account (% GDP) -4.1 -3.9 -5.6Fiscal balance (% GDP) -5.8 -5.9 -3.1Government Debt (% GDP) 3.3 7.8 11.0Daily volumesSpot FXUSD9-10bnPoliticsPrime Minister: John KeyNext election: 2011Despite the election later in the year thegovernment have passed an austeritybudget with NZD5bn in spending cuts.Recent opinion polls suggest strong supportfor the ruling New Zealand National Partybutwith support dipping from the highs.FX Reserves*End of Year20.08bnSource: IMF, S&P, Bloomberg, Barclays21Confidential – not for redistribution. This material must be read in in conjunction with the “Important Information” statement provided on the last herein. page.