While the New Zealand dollar has been underperforming amongst major currencies for the recent week and month, an analysis from the Commonwealth Bank of Australia (CBA) suggests that the settlement of the insurance bill for February’s natural catastrophes could be supportive of the currency. This month saw severe damage and loss of life following the destruction caused by Cyclone Gabrielle, and the end of January was marked by the catastrophic aftermath of the Auckland flooding event.
While the recent underperformance of the NZ dollar was a result of the extreme weather events, the CBA said that the eventual settlement of the many insurance claims that followed could offer the battered currency some support.
"Reinsurers are typically based in Europe. Foreign capital will flow into New Zealand later this year as claims are settled. The capital inflows may support NZD. But the boost to NZD is unlikely to be large,” said Joseph Capurso, CBA head of international economics.
Capurso noted in a report that the NZD/USD exchange lifted from around 0.70 at the time of the Canterbury earthquakes to over 0.80 in 2012 to 2014. “That significant increase in NZD/USD is loosely correlated with capital flows into New Zealand associated [with] settled insurance claims," he said.
A similar event happened when the NZ dollar rose by almost 15% against the US dollar in the two years covering the earthquake and aftershocks impacting Christchurch, New Zealand, and the Canterbury Plains, notably from September 2010 to December 2011. That said, it’s worth noting that there were other factors driving the Kiwi exchange rates during that period.
An estimated 10,000 buildings were destroyed, and 185 fatalities were recorded during these natural catastrophic events.
"NZD/USD followed interest rate differentials with the US in 2011 and 2012,” Capurso said. “Reinsurance‑related capital inflows probably played some part supporting NZD during that period. However, we note AUD/USD increased strongly during that period too."
Global factors also played a part in supporting the AUD and NZD, Capurso said. China’s very large fiscal stimulus in the aftermath of the global financial crisis was one of the period’s most notable events, with its effects spilling over to the rest of the world.
While the damage caused by the recent extreme weather events was extensive, it’s thought that the overall losses are of a lesser scale than that of the earthquakes, meaning that the cost of insurance and the size of its related capital flows are likely to be smaller as well.
The report said that there were 11 fatalities and at least 1,100 people recorded missing as of Tuesday, a situation that explained why the government continued the state of national emergency that was initially declared on Feb. 14.
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