With most developed nations opting to debase their currencies, the Reserve Bank of New Zealand is going the other way and preparing to raise interest rates and keep inflation low. As a result, the New Zealand dollar stands out as one of the lone buying opportunities. The country of New Zealand is politically stable, has exports in undervalued agricultural assets, a favorable business climate and most importantly, is the only developed nation seriously inclining toward raising interest rates.
The primary case for buying the New Zealand dollar is the Reserve Bank of New Zealand’s likelihood of raising interest rates. With New Zealand’s GDP growth rate much higher than other Western nations (2.6% vs. 1.6% in the U.S. and –0.6% in the European Union), and inflation accelerating to a 3.6% annualized pace in the second quarter of 2013, the country has the flexibility to raise rates. Because of growing inflation pressures, rates are expected to rise as early as March 2014.
The increasing strength of the New Zealand dollar also will be a product of continued easy money elsewhere. With the Australian economy slowing down because of less commodity exports, the European debt crisis, continued Abenomics related stimulus and the Fed’s refusal to back down on unlimited QE, no other developed nation will be raising rates in the intermediate-term. Slow growth in these countries also is bearish for their currencies.
Even if developed economies recover, interest rates will not rise because the central banks are using their easy policies not as a measure of economic stimulus, but actually as a tool to monetize their countries’ debt burdens. Central bankers deny this, but without this financial repression, borrowing costs would be too high for these countries to finance their government spending without default or politically unacceptable reductions of the social welfare state. Because New Zealand has a debt-to-GDP ratio of only 36%, higher interest payments do not cripple its sovereign finances. The end result is that the New Zealand dollar will replace the Australian dollar as the high-yield currency in carry trades and will be the only place where bank deposits will yield a positive real return.
New Zealand’s economy also is on a stable footing. The country has some of the world’s highest degrees of economic freedom (ranked 4th by the Heritage Foundation) and lower personal and corporate income tax rates (33% and 28% with dividend imputation respectively) than the United States. Exports mostly consist of agricultural and livestock products that are recession-resistant consumer durables. New Zealand also is one of the beneficiaries of the growth of meat and dairy consumption in Asian markets. Low population density and a highly educated population also are bullish signs for New Zealand’s economic sustainability.
Overall, outlook is strong on the New Zealand dollar because of the likelihood of increased capital inflows resulting from higher rates and economic stability. With markets at stretched valuations, global investors need a place to store their cash. New Zealand is one of the few places with a credible banking system, low corruption and economic stability where an investor can do that while having a positive real return on deposits.
Nicholas Pardini is founder and managing partner of investment firm Nomadic Capital Partners, which specializes in investing in emerging and frontier markets around the globe. His book, “The Definitive Guide to Emerging Market Currencies,” was written in response to his inability to find research on the subject. You can reach him at nick@nomadiccapitalpartners.com.
