Back
10 Nov 2014
NZD: Supportive effect on Canterbury settlements to disappear in coming quarters - Deutsche Bank
FXStreet (Bali) - According to Deutsche Bank, the supportive effect on the NZD from the Canterbury settlements will all but disappear in coming quarters.
Key Quotes
"Since 2011, the New Zealand dollar has traded as much as 30% above its post-float average. But New Zealand’s basic balance has been in deficit throughout this period. Interest rate differentials have supported the exchange rate, but the NZD has looked overvalued to most observers, including the RBNZ."
"In part, the puzzle arises because the basic balance excludes financial inflows from reinsurance settlements related to the Canterbury earthquakes of 2010-11. The earthquakes gave rise to large claims on foreign reinsurance companies, which have gradually been settled since the summer of 2011. These inflows have averaged more than NZD 1 billion a quarter and at times amounted to almost 3% of GDP."
"These inflows have coincided with the appreciation of NZD above its long-run average. The transmission mechanism is the foreign currency holdings of New Zealand’s banking sector. In the balance of payments, reinsurance inflows are recorded as additions to resident banks’ FX assets, as they intermediate final settlements with local insurance companies in NZD."
"As the settlement of claims nears completion in 2015, these flows will cease to prop up the NZD. In the most recent quarter for which data is available (Q2 2014), settlements were down to NZD 544 million, well below the 10-quarter average of NZD 1.3 billion. Payouts have slowed as the majority of claims have been settled."
"The precise end of reinsurance-related support for NZD is difficult to pin down. Reinsurers began accumulating NZ assets immediately after the earthquakes in anticipation of future liabilities. But we expect that the supportive effect on the NZD from the Canterbury settlements will all but disappear in coming quarters. That in turn will exert downward pressure on NZD."
Key Quotes
"Since 2011, the New Zealand dollar has traded as much as 30% above its post-float average. But New Zealand’s basic balance has been in deficit throughout this period. Interest rate differentials have supported the exchange rate, but the NZD has looked overvalued to most observers, including the RBNZ."
"In part, the puzzle arises because the basic balance excludes financial inflows from reinsurance settlements related to the Canterbury earthquakes of 2010-11. The earthquakes gave rise to large claims on foreign reinsurance companies, which have gradually been settled since the summer of 2011. These inflows have averaged more than NZD 1 billion a quarter and at times amounted to almost 3% of GDP."
"These inflows have coincided with the appreciation of NZD above its long-run average. The transmission mechanism is the foreign currency holdings of New Zealand’s banking sector. In the balance of payments, reinsurance inflows are recorded as additions to resident banks’ FX assets, as they intermediate final settlements with local insurance companies in NZD."
"As the settlement of claims nears completion in 2015, these flows will cease to prop up the NZD. In the most recent quarter for which data is available (Q2 2014), settlements were down to NZD 544 million, well below the 10-quarter average of NZD 1.3 billion. Payouts have slowed as the majority of claims have been settled."
"The precise end of reinsurance-related support for NZD is difficult to pin down. Reinsurers began accumulating NZ assets immediately after the earthquakes in anticipation of future liabilities. But we expect that the supportive effect on the NZD from the Canterbury settlements will all but disappear in coming quarters. That in turn will exert downward pressure on NZD."