It has been a very quiet morning in Asia with a lack of headline moving economic data or events, but this hasn’t stopped the kiwi regaining some lost ground against the US dollar. NZDJPY also appears to be on the front foot at the moment as it nears an important resistance zone around 90.00 – it remains in an upward trend.
Would do the fundamentals say?
The big story in NZDJPY is the diverging monetary policies of NZ and Japan. While the BoJ is facing the prospect of pumping even more stimulus into its economy if there isn’t a sustained increase in inflation soon, the RBNZ is happy to remain on the sidelines for time being, before it begins hiking interest rates sometime next year.
The different paths of monetary policy highlight the fundamental differences between the two economies. Japan is still struggling to escape from a period of non-existent economic growth, and at the same time NZ grew at its fastest pace in 7 years in 2014. And, while we expect economic grow to slow in NZ, we are more concerned about the lack of activity at the ground level in Japan.
What does this mean for NZDJPY
Economics 101 tells us that while one central bank is printing money and the other is closer to tightening monetary policy, the exchange rate between their respective nations should be in favour of the latter. However, widespread NZD weakness earlier in the year means that this pair is still lower than it was at the beginning of 2015. Part of this is due to the fact that the RBNZ isn’t as hawkish this year as it was last year, which hurt the kiwi early on. But we still think the long-term fundamentals support further strength in this pair.