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HiFX's Dan Bell sees potential for an OCR hike from a hawkish RBNZ, ongoing strength in the NZ dollar, and more twisting from the US Fed

Posted in Currencies
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Here's our weekly currencies outlook and review with HiFX's Senior Dealer Dan Bell.

The combination of a hawkish Reserve Bank of New Zealand and potential for a new round of stimulus for the United States economy from the US Federal Reserve next week could see the New Zealand dollar push even higher from where it's currently at.

With the Reserve Bank making it clear its focus under new Governor Graeme Wheeler is very much on targeting the 2% mid-point of its inflation band, the New Zealand dollar rose to a one year high of 74.4 on a Trade Weighted Index (TWI) basis after the central bank left the Official Cash Rate unchanged at 2.5% on Thursday. That left the TWI just 1% below its post-float high of 75.19. The Kiwi also rose to US$83.49 cents.

Bell notes the TWI at that level is not far below where the Reserve Bank, under previous Governor Alan Bollard, intervened to try and weaken the Kiwi in 2007.

"On Thursday there was a clear focus from the Reserve Bank on inflation," he says.

"Some analysts had expected the Governor to talk about the high currency and the impact that was having on the economy, and also to reference some of the weaker economic data that we've had over the last quarter or so. But there was a real focus on inflation and the Governor sees inflation picking up in New Zealand next year referencing the Christchurch rebuild and also looking at the property market in general."

Odds now on an OCR hike

Bell says Wheeler's hawkish inflation focused comments grabbed the attention, raising the possibility of an increase to the OCR as soon as next year, whereas the market has been anticipating the next OCR move to be down.

"He (Wheeler) is showing the market that he's more of a hawk at the moment. And on that basis being focused on inflation the market is seeing that as positive for the New Zealand dollar, because it does mean that there will be more likelihood that he will raise interest rates perhaps earlier than some were expecting," says Bell.

"And we've already seen that in the interest rate market, we've already seen the market reduce the potential for a rate cut for New Zealand next year. And I think the odds are certainly on a rate hike towards the end of next year (or) the start of the year after that."

None of this would be welcomed by the export sector.

"The New Zealand dollar up over US83c at a time when our terms of trade are at three year lows, and the currency's a part of that, but we're not seeing a lot of positive news from the exporters at the moment. So at this time I think it's going to be difficult for the economy to gather any real positive momentum if the currency keeps going up."

Could NZ's credit ratings come under threat?

Bell suggests if the New Zealand dollar continues rising, and there's a "perfect storm" next year with property prices continuing to rise and the country's current account deficit continuing to worsen, the credit ratings agencies might look at cutting New Zealand's sovereign ratings.

"If our current account gets worse next year because we keep sucking in capital from offshore to fund this property market, then I think the offshore credit rating agencies will start thinking 'hey, maybe the New Zealand story isn't quite as compelling as it was'."

New Zealand currently has sovereign foreign currency credit ratings of Aaa with a stable outlook from Moody's, and AA from both Standard & Poor's and Fitch, both also with stable outlooks. New Zealand has domestic currency credit ratings of Aaa with a stable outlook from Moody's, and AA+ from both Standard & Poor's and Fitch, both with stable outlooks.

The country's latest current account figures show a NZ$718 million deficit in October. This was NZ$268 million above the consensus deficit forecast by economists and way ahead of the NZ$226 million deficit recorded in October last year. BNZ economists now forecast the deficit will widen to 5.5% of Gross Domestic Product in calendar year 2012, from 4.9% in the year to June 2012, and expect it to "pierce through 6%" during 2013.

Meanwhile, tonight, New Zealand time, US jobs data - non-farm payrolls - is expected to show the world's biggest economy created about 90,000 new jobs in November leaving the unemployment rate unchanged at 7.9%. However, Bell notes Hurricane Sandy is expected to have an impact, meaning people may not read as much into the report as they normally do.

Will the US Fed keep twisting?

Next week all eyes will be on the Federal Reserve's Federal Open Market Committee (FOMC) meeting with the announcement due out Thursday New Zealand time.

"The focus will be on any reference to additional bond purchases, particularly around US treasuries," says Bell. Operation Twist (a stimulus programme where the Fed is buying US$400 billion worth of long-term treasury securities) will come to an end soon (from the end of the year) and the market is anticipating whether or not the US Federal Reserve will start targeting US treasuries again."

"We know they've started targeting the mortgage backed securities market, the QE3+ ( the Fed's third round of quantitative easing, or money printing) that we had a couple of months ago. So whether or not they start targeting US treasuries again may well be revealed next week," Bell adds.

"Obviously that will be negative for the US dollar because it means again the Federal Reserve is prepared to expand their balance sheet and print more money. So (it's) another factor that could potentially give the New Zealand dollar more upside against the US dollar."

Bell also notes that towards the end of the calendar year some portfolio managers like to "park a bit of money" over the holiday season in high yielding currencies like the Kiwi and Aussie dollars.

"And from a seasonal, exporter point of view you tend to see a bit of activity around this time of year as exporters lock in cover (hedging) for next year, not that they'd be liking the current levels in the New Zealand dollar, but they may well be forced to start doing something with their exposures."

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Dan Bell is the Senior Dealer at HiFX, a UK-headquartered foreign exchange dealer with significant operations in Australia and New Zealand. It has a dealing room in Auckland. See more detail here.

 

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13 Comments

Couple of Rate hikes should

Couple of Rate hikes should get NZ$ to .90+ and deflation seriously kicking in ...

Was that an earthquake I felt

Was that an earthquake I felt this morning?
Naah, was just mortgage holders starting to collectively quiver in thier boots in light of Mr Wheelers comments.

As long as it wasn't a bulb

As long as it wasn't a bulb of magma crashing through solid rock on its way to fuel Taupo's magma chamber...
 
http://en.wikipedia.org/wiki/Hatepe_eruption
 
 

Mortgagebelt, I hope you're

Mortgagebelt, I hope you're correct, I would welcome deflation since I live on a fixed income and out of savings. Deflation... Bring it on!
H...GeeDubya

Ditto, Ivan. What's the bet

Ditto, Ivan. What's the bet that once he start to raise rates, the economy will start to come right. Handicapping all those who have savings is not going to help keep asset prices high if they are forced to sell, offsetting their lower interest income. All that lowering rates seems to do is encourage the most economically reckless amongst us, while others sit on their hands waiting for it to come right after rates have bottomed.

More OCR hike cheerleading.

More OCR hike cheerleading. Oh well, even a broken clock is right twice a day as they say. Meanwhile, this is at least the second post on this website containing the quotation about capital inflows worsening the current account. Now, I am no "senior dealer" (whatever that is supposed to be and however that is meant to qualify someone in macroeconomics, as opposed to just sales) but I cannot see how INFLOWS OF CAPITAL could ever worsen our balance of payments. I also can't understand how capital flows can have anything to do with the current account balance, which is by definition made up of current (i.e. specifically not capital) transactions. Surely he means the capital account. He may be referring to the fact that excessive inflows today raise the risk of disorderly outflows later, but capital inflows certainly do not worsen the balance of payments, and absolutely not the "current" account. 

Finally I would ask some of the posters here to reflect on some economic history, and specifically how central banks' hawkish responses to the stock market bubble and crash in the 1920s brought about the Great Depression in the 1930s. When the economy is in the doldrums as it is today around the world, the absolute worst thing that can happen is a total obsession with price stability at the expense of, frankly, more important matters. Your savings should not be in the bank; they should be out circulating and providing income for others or at least acting as a socially beneficial investment. Hiking interest rates has never stimulated economic growth to my knowledge. History repeats, it seems.

Agree.....but then "most"

Agree.....but then "most" economists these days are what are best described as fresh water school....or I prefer voodoo economics....or, the ones that spout such rubbish knowing full well someone else takes the pain and not them or so they think.

So actually I think wheeler is too  hawkish so the way to cure that is, he should raise the OCR by say 50 points.  That will destroy our economy, National's second term and with it his tenure.  Then maybe ppl will wake up to how dire things are and how many blinkered there are "in charge"

 

regards

 

 

 

 

 

 

 

Frankly I think an OCR hike

Frankly I think an OCR hike would be insane.  PPl are being stupid, if you cant see this as another tulip event well under way...oh dear. 

You cant raise the OCR to cool the stupidity without huge collateral damage.  Put a lid on mortages of no more than 25 years and 95% LVR....and start to lower that 1% per year.

regards

Hey Interest, how about

Hey Interest, how about keeping a tally of such predictions and their effects? Visit them at the end of the year and see how these "experts" have done....I predict abysmally.

 I think this guy isnt worth the air he breathes but then Ive had a zero appreciation of all the currency ppl you have had here in the past. They all have 20/20 hindsight but are otherwise blind. Lets see,  "rise sometime next year" is a pretty big window, lets see if he's right....of course the RB's that have done that in the last 4 years have reversed pretty quickly, it seems some ppl cant learn its now different despite the contary evidence to "busness as normal" before them.

regards

And a Merry Xmas to you

And a Merry Xmas to you too.

 

And while you are at it give us a copy of your CV confirming your inexperience to pass such ill formed opinion.

 

 

How about look at the track

How about look at the track record of the gloomsters....or Paul Krugman v the gold bugs / austrians etc over the last 4 years.  Not only do we not have hyper-inflation we dont really have any significant inflation at all. And none in the offering until a) un-employment starts to drop and b) the large over-capacity is absorbed...fat chance at debt saturation.

Worse, didnt John Key say he expected our economy to be growing at 6%?  given the present level of stimulus? yet it wasnt/isnt...is it. Has lots of financial experience in trading doesnt he...yet he's looking pretty clueless.

Or that Treasury in 2008 even in its worst predictions over how our economy was going to perform over estimated how it actually did.

Or that the RB "thinks" that chch will be a stimulus, yes ok but really its make work....

So, note down my opinion(s) and take a look in dec '13....lets see how gloomsters such as myself do v those in la la land, consider that my "CV"

Otherwise you know what I act on my opinions....anybody else is free to act on theirs.

regards

 

 

 

 

CV, add this, here is a

CV, add this, here is a really good piece with two sides of the predictions.....lets see how that does in dec 13...

Watch that oil shale play...

http://ceasefiremagazine.co.uk/great-oil-swindle-black-gold-rush-leads-f...

regards