A few central bankers across the globe counted on the Federal Reserve to help them deal with weak global growth and lingering disinflationary pressures. They feel relieved now. Countries such as Canada, Australia and New Zealand should take advantage of this decision as it would maintain the greenback at a high level against their respective currency.
This dollar strength should help them to reach their inflation target and support growth through an increase in exports volume. On the other hand, emerging-market countries that have a substantial part of debt denominated in US dollar – such as Indonesia, Mexico, South Africa, Turkey or Brazil – will likely feel the blow due to higher debt-servicing costs and renewed inflation pressure (for some of them). The Reserve Bank of New Zealand definitely stands among the lucky ones as Janet Yellen took weight off of the RBNZ’s back by increasing the federal fund rate last Wednesday. Indeed, the move will prevent Governor Wheeler to lower the official cash rate further. As a reminder, the OCR was trimmed four times over the past eight months (from 3.50% to 2.50% on December 10th) in an attempt to boost exports and to bring inflation back within the 1%-3% target range. Looking at the latest projections, the RBNZ pushed back the timeframe for reaching the inflation target by roughly one year compared to the previous forecast on falling crude oil prices. In its MPS from December, the RBNZ expects headline CPI to reach the bottom of the target range in early 2016 and to move toward the mid-point at the very end of 2017. In spite of this drawback, the RBNZ is more optimistic on growth as it revised higher its forecast. Despite a fall in dairy prices and, to some extent, a decline of prices foe forestry and meat products, the central bank increases its GDP forecast for 2016 from 2.1% to 2.2% and from 2.5% to 2.9% for 2017, compared to September’s estimates, as the central bank expect a pick-up in export prices and strong population growth.
Overall, we expect commodity currencies to remain under pressure in the foreseeable future as the slowdown of the Chinese economy will continue to weigh on global demand, and therefore prices. In the wake of the Fed historic decision, the Kiwi fell roughly 1.50% in a couple of days, down to $0.67. The NZD remains exposed to selling pressure, especially since the commodity rout is not done yet.