There was an interesting little shift in the dollar recently – one that was a little bit surprising at first look.
In the past month the dollar has been falling, first as a result of the Canterbury earthquake, then due to the 50bp cut in the official cash rate by the RBNZ. This all makes sense. But then the dollar dropped very sharply from around the 15th of March – this was well after the MPS, and nothing had happened in NZ. What was going on?
Specifically, the dollar dropped heavily against the Yen:
While the dollar was largely unchanged against the Aussie (apart from a random brief spike).
So what can we take from this? Well, what was going on on the 15th.
- A few days earlier a massive earthquake hit Japan.
- By the 14th and 15th there were increasingly dangerous explosions in Japanese nuclear power plants following the quake.
With nothing else going on, it appears that concerns around nuclear fallout in Japan was the primary driver of a steep fall in the New Zealand dollar – especially against the Yen.
Read this another way, Japan has been hit by a major crisis and its dollar is appreciating! I’ve seen this happen before in another large open economy called the United States – and I don’t like it.
So how does a negative shock to a country lead their dollar to appreciate – and why does it appreciate most strongly against countries like New Zealand and Australia. Well there are a few theories we can speculate with:
- Even with the crisis, Japan and the US are seen as “safe havens” while NZ and Aussie are “risky” – as a result, when people get nervous they sell risky assets (NZ currency) and buy safer assets (Japanese currency). My main issue with this is that we also saw the Yen appreciate against the US dollar – however it could just be that the Yen is an even safer asset than the US currency.
- A large amount of NZ’s external debt is financed by savings in Japan. If Japanese residents are going to pull money back following the crisis (or are at least expected to) this could drive down the value of the NZ dollar.
- The crisis in Japan is expected to interrupt, and reduce, global growth. Given that we are a small open economy we are more vulnerable to changes in the global economic cycle – leading to our dollar responding more aggressively to such events.