There is an interesting article on the Rates Blog that I have been meaning to mention by Rodney Dickens.
Although I don’t agree with him that the RBNZ is being silly – I do think he makes a good point when looking at the exchange rate.
the forex market [may have] pushed the exchange rate up because it has correctly assessed that NZ growth prospects have improved
When I read this on the 5th I agreed with it – and if anything this point of view is becoming more obviously right as a bunch of good data has come out.
However, I would take a step back and try to understand what is going on here. I don’t think that the growth outlook is the sole factor – we also have “risk taking behaviour” (as our currency is a form of investment) and commodity prices (as our currency helps to share any gains from a terms of trade lift.
Now ANZ reports that commodity prices rose in both March and April – so this is some of the reason. However, in $NZ terms they fell – implying to me that there has been more to it. With the DOW rising from 6,500 to 8,500 (among other indicators) we can tell that there is some risk loving behaviour coming back – making a high yielding currency like the $NZ attractive. If we strip these out we might find that the market expects marginally higher growth – but I’m not convinced that this view is particularly different to the RBNZ’s March forecasts 😉