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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