Expect More RBNZ Rate Cuts, but New Zealand ETF Might not Care

The Reserve Bank of New Zealand is prepared to continue lowering interest rates, though it has cautioned against large one-time reductions because the economy there is not yet weak enough. However, the iShares MSCI New Zealand Capped ETF (NYSEArca: ENZL) might not care what RBNZ does with rates. At least not in the near-term.

ENZL, the lone dedicated New Zealand ETF on the market today, is off 12.5% year-to-date as commodities prices have tumbled, indicating commodities remain a key driver of New Zealand equity market performance.

Moreover, ENZL’s nearly 14% loss over the past 90 days is alarming because RBNZ has lowered rates twice, each time by 25 basis points, in just over a month. That after the central bank defied conventional developed market wisdom by surprisingly raising last year. At 3%, New Zealand’s benchmark interest rate appears on course for the record low of 2.5% last seen in April 2009.

“While traders still see a strong chance of a quarter-point cut in September, they reduced bets on the central bank cutting the cash rate to 2.5 percent in October after (RBNZ Governor Graeme) Wheeler’s speech, according to swaps prices compiled by Bloomberg” reports Matthew Brockett for the news agency.

Although New Zealand is viewed by outsiders as an export-driven economy, ENZL soared in the first half of 2014 as the kiwi strengthened, but the ETF has flailed as the local currency has swooned. Another knock on New Zealand has been that the country is running a current account deficit, a scenario global investors are apt to monitor closely following prior repudiation of some emerging markets with vulnerability to external financing demands. [Mixed Bag on Account Surplus Trade]