New Zealand’s financial system gained positive market sentiment over the beginning of 2012 although it remains vulnerable to global instability, according to the Reserve Bank of New Zealand (RBNZ) on Wednesday.
Uncertainty remains over the European economic situation as fiscal imbalances continue and competition increases. One issue continues to be Spain’s wavering fiscal competence. Conditions perturb market confidence and risk reverting positive gains that have been made. Increased concern over any region’s imbalances could choke global debt markets which are important to the country’s banks. Furthermore, additional instability would counteract the small positive gains made in global economic recovery. New Zealand households hold cautious about spending, saving more as business investments remain lower. On the other hand, the private sector’s debt has reduced although public debt has risen.
Expansion across the majority of developed economies has stayed weak. Additionally, Australia and China have exhibit indications of slowing as commodity prices have fallen in the past few months.
The New Zealand banking system continues to build strength even as volatility continues abroad, but credit demand remains soft. RBNZ Deputy Governor, Grant Spencer stated, “Encouragingly, international debt markets have freed-up over 2012 with term funding now available again, although the cost remains elevated. A strong inflow of retail deposits has enabled banks to lift their domestic funding shares and minimize offshore funding use. All banks are now meeting the Reserve Bank’s Core Funding Ratio by a comfortable margin and we have confirmed our intention to lift the ratio from 70 percent to 75 percent in January next year.”
The NZDUSD has continued to slide after breaking through support at 0.8050. Since New Zealand’s economy is heavily dependent on Australia, which has recently cut its economic outlook, we expect tough times for the Kiwi economy ahead. The NZDUSD could target support at 0.7700 over the coming weeks.
Eugene Ross, Analyst
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