NZD: Capital is Flowing into New Zealand Economy

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The long-term exchange rate target zone performance as well as the medium-term exchange rate target zone performance confirmed the flow of capital into the NZD and NZD-denominated debt securities in medium to long-term to fuel the New Zealand economy. This will pressure the New Zealand central bank (Reserve Bank of New Zealand) to undertake central banking market sterilization to slower the strengthening of the NZD in the market to maintain sustainable economic and financial stability.

The NZD's currency yields attract the USD, EUR, CHF and JPY investors to invest into NZD and NZD-denominated debt securities. The volume of NZD and NZD-denominated debt securities in circulation is limited which will pressure the four hourses (USD, EUR, JPY, CHF) to compete each other for their asset allocation management. Looking for 10 % yield is rationale and much higher than current borrowing rates on USD, EUR, JPY and CHF. Carrying the NZD is one of the primary target by carry traders.

Market sterilization will be undertaken by RBNZ at upper medium-term bands to slower the strengthening of NZD in the market and no market sterilization will be undertaken at lower medium-term bands. Market participants already anticipate the turning at lower medium-term by reentering their long position and supportive for central bank not necessary to undertake market sterilization (called honeymoon affect by Paul Robin Krugman).

The capital inflow into the NZD and NZD-denominated debt securities to fuel the economy will drive the inflation to upside risk and driving the economy to grow in parallel. This will pressure the RBNZ to increase interest rate periodically to slower the inflation risk.
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