Canadian and New Zealand currencies illustrate economies going in different directions
One glance at this quarter’s foreign-exchange returns shows how far apart developed economies are in normalizing their monetary policies.
After moving in the same direction versus the U.S. dollar every year since 2007, New Zealand’s currency, nicknamed the kiwi, has been the biggest gainer and Canada’s loonie the biggest loser among 16 major peers in 2014. The Antipodean nation this month became the first developed economy to raise interest rates since 2011, boosting the kiwi’s allure for investors, while Canada hasn’t ruled out further cuts to borrowing costs.
That policy split reflects a divergence in the economic health of two nations that have traditionally been linked by their reliance on exporting commodities. New Zealand has reduced the deficit in its current account to the least as a proportion of gross domestic product in two years, while the broadest measure of Canada’s trade is deteriorating.
“New Zealand is in a whole different world because the central bank has already started the tightening process, and attracting capital inflows is much easier when the interest-rate dynamic is positive,” Adam Cole, the global head of foreign exchange at Royal Bank of Canada, said in a March 26 phone interview from London. “Canada is a story of imbalance, with a large external deficit and the unwillingness of the central bank to raise interest rates.”
Kiwi Call
Buying the kiwi versus the loonie was one of Cole’s key recommendations at the start of 2014. His firm sees the Canadian currency weakening about 4 percent to $1.15 per U.S. dollar by year-end, a more pessimistic forecast than the $1.14 median estimate of analysts surveyed by Bloomberg. RBC is also less bullish than most on the kiwi, predicting a drop of more than 7 percent to 80 U.S. cents, compared with a median forecast of 82.
New Zealand’s dollar strengthened 5.5 per cent versus the greenback this year, while its Canadian counterpart fell 3.7 per cent — the best and worst performances among the most-traded currencies tracked by Bloomberg. The kiwi touched a 2.5-year high of 86.97 U.S. cents on March 28, while the loonie fell to an almost five-year low of $1.1279 per U.S. dollar on March 20.
“Monetary policy divergence between New Zealand and Canada has become more evident since the beginning of the year,” Ian Stannard, the head of European foreign-exchange strategy in London at Morgan Stanley, said by phone March 27. “We often put the Canadian dollar and the kiwi into the commodity basket, but there are very different drivers at work with these currencies now. The move can go further.”
Canadian and New Zealand currencies illustrate economies going in different directions
One glance at this quarter’s foreign-exchange returns shows how far apart developed economies are in normalizing their monetary policies.
After moving in the same direction versus the U.S. dollar every year since 2007, New Zealand’s currency, nicknamed the kiwi, has been the biggest gainer and Canada’s loonie the biggest loser among 16 major peers in 2014. The Antipodean nation this month became the first developed economy to raise interest rates since 2011, boosting the kiwi’s allure for investors, while Canada hasn’t ruled out further cuts to borrowing costs.
That policy split reflects a divergence in the economic health of two nations that have traditionally been linked by their reliance on exporting commodities. New Zealand has reduced the deficit in its current account to the least as a proportion of gross domestic product in two years, while the broadest measure of Canada’s trade is deteriorating.
“New Zealand is in a whole different world because the central bank has already started the tightening process, and attracting capital inflows is much easier when the interest-rate dynamic is positive,” Adam Cole, the global head of foreign exchange at Royal Bank of Canada, said in a March 26 phone interview from London. “Canada is a story of imbalance, with a large external deficit and the unwillingness of the central bank to raise interest rates.”
Kiwi Call
Buying the kiwi versus the loonie was one of Cole’s key recommendations at the start of 2014. His firm sees the Canadian currency weakening about 4 percent to $1.15 per U.S. dollar by year-end, a more pessimistic forecast than the $1.14 median estimate of analysts surveyed by Bloomberg. RBC is also less bullish than most on the kiwi, predicting a drop of more than 7 percent to 80 U.S. cents, compared with a median forecast of 82.
New Zealand’s dollar strengthened 5.5 per cent versus the greenback this year, while its Canadian counterpart fell 3.7 per cent — the best and worst performances among the most-traded currencies tracked by Bloomberg. The kiwi touched a 2.5-year high of 86.97 U.S. cents on March 28, while the loonie fell to an almost five-year low of $1.1279 per U.S. dollar on March 20.
“Monetary policy divergence between New Zealand and Canada has become more evident since the beginning of the year,” Ian Stannard, the head of European foreign-exchange strategy in London at Morgan Stanley, said by phone March 27. “We often put the Canadian dollar and the kiwi into the commodity basket, but there are very different drivers at work with these currencies now. The move can go further.”
Canadian and New Zealand currencies illustrate economies going in different directions