While the third rate hike in New Zealand was expected, and even though it was accompanied with comments desiring for a weaker NZD, the local currency jumped across the board.
The NZD’s move higher against the euro was especially notable, as the EUR/NZD cross dropped to lows last seen in May 2013. Is the carry trade fully back? Is the euro serving as the funding currency?
Why did the kiwi jump despite the event developing as expected? A possible explanation is that with the announcement of a higher interest rate, more money will flow from yield hungry investors.
And where will this money come from? Well, most developed countries already apply a very low interest rate. Yet only one major central bank has a negative deposit rate: the ECB.
As banks are basically “punished” to park funds withe European Central Bank, they do enjoy a much higher and a certainly safe place in New Zealand.
Before the Global Financial Crisis, sitting on NZD/JPY was the classic carry trade: the interest in New Zealand crossed the 8% level, while it never rose above 0.50% in Japan. The rate differentials and currency stability worked perfectly well, until the music stopped and the carry trade was unwound.
Will such an unwinding happen again? Not so fast. While there are worries about valuations of stocks, the interest rate in New Zealand still has room to rise, while it digs below the bottom in the old continent.
Further levels below are 1.5450, 1.5075 and 1.4980. On the topside, we have 1.5920. Here is the chart:
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