By Roger J Kerr
The Governor of the Reserve Bank of New Zealand, Graeme Wheeler could take a leaf out of the book of his Australian counterpart, Glenn Stevens on the “Art of Currency Jawboning”, judging by recent statements and exchange rate movements.
While our Governor has conveyed mixed and perplexing messages about intervention in the overvalued NZ dollar exchange rate over recent months, the RBA Governor has been much more successful with a message to the markets last week that speculative buyers of the AUD need to be wary of the risk of loss when the currency value falls.
The AUD/USD rate has as a result reversed engines from pushing 0.9500 to trade 1½ cents lower at 0.9350 over the past week.
Weaker Australian merchandise import/export trade data has also contributed to the AUD decline.
The NZD/USD has not been able to make gains above the previous high of 0.8780, but has only retreated to 0.8740.
Since the 12 June Monetary Policy Statement wherein the RBNZ surprised the financial markets with a more hawkish than expected stance which automatically pushed the NZ dollar three cents higher to 0.8780, the RBNZ has been a total cone of silence.
The RBNZ have been warning about the consequences of an overvalued NZD currency for more than two years now, however apart from the odd threat of official intervention to sell the currency they have shied away from any overt action.
While dairy and other export commodity prices were increasing and the US dollar itself was weak for its own reasons the appreciating Kiwi dollar was justified on economic fundamental grounds.
However, over recent months the environment and lead indicators have changed abruptly and now point to a lower exchange rate value.
Counteracting the Kiwi dollar negatives is the fact that the RBNZ are the only western economy increasing interest rates at this time and the first to do so since the GFC.
The high interest rate differential between New Zealand and other economies has certainly attracted investors out of Asia and elsewhere into the NZ dollar at this time.
Looking ahead at future NZD/USD direction over coming months, the following three determinants will hold the key to the timing and extent of expected NZ dollar depreciation from the 0.8700 level:-
- The continuing divergence between tumbling export dairy and log prices and the NZ dollar value. Fonterra is expected to lower their 2014/2015 milksolids payout forecast from $7.00/kg to something nearer $6.00/kg later this month which will again knock GDP growth and rural spending. The Terms of Trade Index (import/export prices) to 30 June when next released on 1 September will confirm a large 10% plus decrease and the highlight the massive divergence from the record high NZ TWI currency index.
- The RBNZ being forced to acknowledge that the housing market threats to inflation have abated with rising mortgage interest rates causing a slowdown in both housing activity levels and price increases. The RBNZ were frustrated that bank fixed-rate mortgage lending interest rates actually decreased over the period of OCR increases from March to June. However, over recent weeks all the banks have increased fixed mortgage rates and the higher debt servicing costs are now starting to have the desired traction in the domestic economy.
- Stronger jobs growth in the US economy over recent months has confirmed the robustness and sustainability of the US economic recovery, rendering Federal Reserve Chair Janet Yellen’s overly cautious approach to the unwinding of monetary stimulus as misplaced and prone to monetary policy error. With the US unemployment rate at 6.1% and confidence gauges such as auto sales at eight-year highs, it can only be a matter of time before the financial and investment markets start to price in a change to the Federal Reserve’s rhetoric in respect to how and when US interest rates increase. The USD will be appreciating on global FX markets well ahead of the Fed being forced to change their current stance.
The local moneymarkets are pricing in another 0.25% OCR increase from the RBNZ on the next 24 July OCR review date.
While the there is a very high likelihood the RBNZ will announce that expected increase, the Australian central bank approach of the occasional surprise to the markets to maximise impact (i.e. no OCR increase) would be more effective in terms of the RBNZ delivering on their threat of intervening to bring an overvalued currency down.
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Roger J Kerr is a partner at PwC. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
5 Comments
"Counteracting the Kiwi dollar negatives is the fact that the RBNZ are the only western economy increasing interest rates at this time and the first to do so since the GFC."
Think you need to see the RBNZ aims and perspective from a World Bank/Global point of view, not just the local NZ & Australia currencies & interest rates.
This is why we are the only Western, developed economy hiking interest rates.
I agree "when you look at today’s opportunity set, you’re left with a set of assets where nothing looks attractive from a valuation point of view")
"or buy gold mining stocks"
The problem I have with gold mining stocks is we are at our about peak gold, this means like oil it costs more and more energy to get the gold left out so its a double whammy and mines are looking un-economic IMHO.
I always like such sites for what they can find out there in terms of data and information, however their conclusions and logic is so politically blinkered its skewed....
"the Chinese are printing more money than the US. On average, they have created Renminbi for the countervalue of 50 bn $ per month over the last six months. This is an enormous amount. Then the European Central Bank is willing to add 1100 bn € over the next two years which equals an expansion of 50% of its balance sheet. So we will continue to swim in a sea of liquidity. The question is whether there might be other events and developments that may not be camouflaged by liquidity which could cause a change of investor expectations. Liquidity is one thing, but there are fundamentals also."
"Fundimentals", oh like energy...nope, printing....its just wrong I tell you....wrong.....buy gold, run for the hllls.....buy Ammo....
Oh wait actually Ammo might be a good buy, its getting more and more expensive and has utility so its tradeable.
"Investors are prepared for a conventional ending of the cycle with higher growth and capacity utilization resulting in higher inflation, rising interest rates and tightening liquidity that leads to a bear market."
The BAU outlook....back to never ending growth, in an era of expensive and harder to get fossil fuel....so no not "fundimentals" at all.
This is the disconnect between Wall Street and Main Street, the former needs little energy, the latter lots. The former is parasitic on the latter but the latter is energy starved to death...
regards
A different view of the same thing,
http://krugman.blogs.nytimes.com/2014/07/07/knutty-asset-prices/?module…
"..........and once you concede that asset prices might make sense, you lose the supposed evidence that rates are all wrong."
which makes me sit back...
"..........Mainly, though, there simply isn’t any macroeconomic case for claiming that interest rates are wildly depressed relative to fundamentals, and not much reason to believe that assets in general are overvalued."
regards
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