Watch Out Kiwi! RBNZ To Cut Rates After Dovish Fed, Warns Morgan Stanley – Barron’s (blog)

By Shuli Ren

Asian currencies have rallied since the U.S. Federal Reserve lowered its rate hike outlook to just 2 this year.

Asian central banks from Japan to Australia are wary of their currencies soaring. But who is the most intolerant of a weaker dollar?

According to Morgan Stanley, which sees only 1 hike this year – in December, the Reserve Bank of New Zealand is most sensitive to the dollar, followed by Reserve Bank Of Australia and Bank of Korea.

In the last two days, the New Zealand dollar has gained 3.5% and is up another 0.2% this morning. Here is strategist Jessica Liang's justification:

NZD strength has already undermined the RBNZ's forecast for a recovery in inflation as 4Q15 tradable inflation missed the RBNZ's expectations by a large margin at -2.1%Y (vs forecast at -1%Y). Post the Fed, NZD TWI has already recovered most of the losses since RBNZ's surprise rate cut on March 10th. In the March MPS, the RBNZ precisely highlighted the possibility of this scenario where more stimulus from global central banks would prevent the NZD TWI from depreciation.

Earlier this week, New Zealand reported better-than-expected fourth-quarter GDP growth, dampening expectation that the central bank will cut rates further. But so what? This number is history and the economy was losing steam in January. Capital Economics' Paul Dales wrote:

Overall, it seems that the economy ended last year with a lot of momentum. But it's surely only a matter of time before the weakness in the dairy sector spreads to other areas. Indeed, our own monthly measure of activity (the Capital Economics New Zealand Activity Proxy) suggests that growth slowed in January. The RBNZ expects that growth will accelerate from 2.5% in the 2015 calendar year to about 3.0% this year. We don't think it will improve at all.

Overnight, the iShares MSCI New Zealand Capped ETF (ENZL) gained 1.4% on kiwi strength.