Sunday, November 1, 2015

New Zealand interest rate news lowers the Kiwi | … until China changes its one-child policy

Last week was an interesting one for the New Zealand dollar, or the Kiwi as it is known in Forex trading circles. From Tuesday the NZDUSD pair showed a distinct weakness in the run-up  to the monetary policy statement by the Reserve bank of New Zealand (RBNZ), which was widely expected to keep interest rates (OCR – the Official Cash Rate) unchanged. In the event, the statement from the central bank governor, Graeme Wheeler, not only kept rates unchanged, but went as far as to state: “To ensure that average CPI inflation settles near the middle of the target range, some further reduction in the target range is likely”. Low and falling core interest rates in NZ are calculated to weaken the currency, and its fate on the Forex markets was consistent – it continued to fall after the statement.

China removes its one-child policy

In an attempt to control its population, China has long had a policy of allowing couples to have only one child. This law is deeply controversial. It allows for fines, and makes an additional child or children ineligible for child support payments and other forms of social welfare. However, it has been in place since the 1970s, and is estimated to have resulted in the current population of China being some 400 million less than it otherwise would be. Now that policy is to be modified to make it allowable for couples to have two children. This is apparently in response to popular demand, but is also a measure to counter the effects on the economy of an aging population.

The New Zealand dollar is a commodity currency, and the commodity that matters most here is dry powdered milk. According to Fonterra, the large NZ dairy Co-Op, 95% of milk production in the country is exported, and New Zealand cows produce a lot of milk. The lion’s share of that goes to China, where it is mainly used in baby formula.

It is not difficult then to see how the prospect of a baby boom in China would be a positive for the Kiwi. This proved to be the case last week, and the early interest rate inspired weakness was neatly reversed on receipt of the news out of China, as can be seen from the chart at the top.

This is also good news for Ireland. Apart from New Zealand, it is one on the most important exporters of milk products to China. And earlier this year China also lifted a ban on Irish beef imports which had been imposed on all beef from the EU in response to the BSE scare of some 15 years ago.

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