RBNZ Comments Weigh on NZD
This morning the RBNZ left interest rates on hold, however Governor Wheeler was more downbeat than at last year’s meeting. This saw the NZ dollar fall across the board and is currently trading at $0.64 against the US dollar. Across our portfolio we are positioned for weaker Australasian currency’s, with one of our key holdings which benefits from a lower NZD being Fisher & Paykel Healthcare (FPH.NZ). FPH has continued to perform strongly during the current market turmoil and is up 18.8% since September last year.
RBNZ Leaves Cash Rate at 2.50%
As widely expected, the RBNZ left the cash rate unchanged at 2.50% this morning. The Reserve Bank highlighted risks pertaining to global growth and lower commodity prices as key risk factors for the wider economy. Slowing China growth and falling oil & dairy prices were mentioned specifically, as these have been key factors driving financial markets of late. Although there were a number of bright spots to the economic outlook. Net migration continues to increase, which should translate into higher domestic growth and productivity. The RBNZ also mentioned that economic conditions had become more accommodative with the NZD continuing to fall and market interest rates (i.e. mortgage rates) declining. Tourism is also providing a boost to the economy, and as the NZD falls its effects will resonate further through the economy.
RBNZ Outlook
We believe interest rates will remain low for some time. Further there is more chance that the Official Cash Rate goes lower than higher over the medium term. This should translate into a weaker currency over time and should also mean mortgage rates stay low in New Zealand. The RBNZ was a more down beat than at its last announcement and believes that they are aware of the weaknesses in the economy. At this stage the RBNZ do not think a further lowering of the cash rate is warranted, however should financial conditions continuing to be challenging, they will respond. Equity’s that have exposure to weakening NZD, lower interest rates and exposure to the tourism sector will be clear benefactors of the RBNZ’s policy stance. hold a number of these stocks in its portfolio as a weaker NZD and improved tourism are key thematic views.
Fed Leaves Rates Unchanged
The US Fed stated this morning it is closely monitoring global economic and financial developments and is assessing their implications for the labour market and inflation, and for the balance of risks to the outlook. While the Fed has left open the prospect of a rate hike in March, the risks are now skewed to the Fed waiting till later in the year, in our view. However, over the medium term we expect a path to higher rates in the US to result in further US dollar strength against both the NZ dollar and AU dollar.
Chart of the Moment
Fisher & Paykel Healthcare (FPH.NZ) has been one of the main beneficiaries of a lower New Zealand dollar, as almost all of its revenues are generated outside of New Zealand. This has certainly not been lost on the market, as illustrated by share price moves. However currency moves aside, FPH has experienced strong operational improvements from new products which have been years in the making which combined with our forecast for a lower New Zealand Dollar will continue to act as a tailwind to earnings going forward.