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Roger J Kerr says inconsistency of the messaging and action is arguably adding to currency volatility and leaving the NZ dollar value much higher than would otherwise be the case

Currencies
Roger J Kerr says inconsistency of the messaging and action is arguably adding to currency volatility and leaving the NZ dollar value much higher than would otherwise be the case

By Roger J Kerr

It has been domestic decisions and events that have returned the NZD/USD exchange rate to the 0.7000 level over recent days, which is in contrast to the weaker USD offshore a month ago when the Federal Reserve adopted a “go slow” speed on US interest rate increases.

When the RBNZ surprised the markets in early March with a 0.25% OCR interest rate cut they did not get the expected lower currency impact they had hoped for as the US dollar weakened on global FX markets at the same time and the NZD/USD increased from 0.6600 to above 0.7000.

It might be said that the RBNZ was just plain unlucky with that March timing and their good intentions to drive the NZ dollar lower to get annual inflation back within the 1% to 3% target band was usurped by Janet Yellen’s overly cautious dovish signalling.

However, the April 28 OCR review where the RBNZ left the interest rate unchanged at 2.25%, which pushed the NZ dollar back up two cents from 0.6800 to 0.7000, could not be put down to bad luck. It seemed to be more a case of the RBNZ being unaware of how the FX markets would react to their decision.

The power a central bank has to influence financial markets in the direction they desire is lost when threats and warnings are not followed through on with overt action.

In March the RBNZ stated that they would cut interest rates again unless economic data and inflation were stronger than what they were forecasting.

The fact that the NZ dollar jumped up two cents following last Thursday’s  OCR review strongly indicated that the FX markets were “short-sold” NZD’s going into the statement expecting another 0.25% cut. When the cut did not eventuate, those short position holders were forced to buy their NZD’s back, thus the resulting appreciation.

To be fair, the local interest rate markets was only pricing a 30% probability of an interest rate decrease beforehand and the local economists were evenly split.

The RBNZ may have missed a trick on this occasion as they had the opportunity to push the NZ dollar lower with another OCR cut. However, they somehow found enough reasons to hold fire for the meantime.

The inconsistency of the messaging and action is arguably adding to currency volatility and leaving the NZ dollar value much higher than would otherwise be the case.

It appears that the RBNZ were somewhat spooked by latest housing data, which confirmed another surge in prices through March and April.

In their March Monetary Policy Statement the RBNZ were forecasting the rate of house price increases to fall back in 2016. That has not been the case and therefore the decision not to reduce the OCR last week seemed to be driven by worries of stoking the over-heated property market further with lower mortgage interest rates.

It has been the view of this column over recent weeks that the looming crisis in the dairy industry with a third year of prices/incomes below break-even was the more urgent issue for the RBNZ to address by reducing interest rates to drive the NZ dollar lower. Unfortunately, the opportunity to return of the NZD/USD rate to the 0.6500/0.6400 area to assist the dairy sector was not taken by the RBNZ.

If the NZD/USD rate is still near to 0.7000 at the end of May, the milksolids payout forecast for the new 2016/2017 season will be again dismal for our largest industry.

External developments this week may, however, prevent the NZ dollar holding up at the 0.7000 level. The Australian dollar has not performed that well over recent weeks despite a weaker USD and higher commodity prices in global markets. Their March quarter’s CPI inflation number was -0.2% against prior forecasts of +0.3%, a shock to the markets that resulted in Aussie dollar selling. That selling may continue this week if the Australian Federal Government’s fiscal deficit is higher than expected at tomorrow’s budget announcement.

The NZD/AUD cross-rate has shot up from 0.8900 to 0.9170 with the recent AUD weakness/Kiwi strength. At 0.9170 the Kiwi dollar is well over-cooked against the AUD (the interest rate differentials point to 0.8600) and speculative selling of the NZD should return the cross-rate to 0.9000 and below.

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Source: CoinDesk

 

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

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10 Comments

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El Plonko said on the day he wanted a lower dollar - what did he expect with the decision he made on the day. Amateur hour.

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External developments this week may, however, prevent the NZ dollar holding up at the 0.7000 level. The Australian dollar has not performed that well over recent weeks despite a weaker USD and higher commodity prices in global markets.

Some institution(s) of might will have to stick save this falling knife before the NZD/USD pair can move south.

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What keeps the NZD high is high interest rates compared to other developed countries. Simple

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Yeah, right - it just collapsed against the Japanese Yen which sports a negative interest rate policy regime. View NZD/JPY graph You need to deepen your understanding of the forces that drive currency pair pricing in a world dominated by credit based reserve currency systems. It might help if you knew what the demand implications are for a USD/JPY 5 yr cross currency basis swap quote ~ negative 100bps. Here's a primer.

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There is a great deal more going on than the OCR. I would like to know what the daily volume of trade in the NZD, what percentage is actual business (i.e. company's actually buying and selling currency for trade purposes) and what volume is just speculation of some sort.

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A rough estimate is $50B per day traded, but only $12-13B legitimate (in the NZ session). Fonterra maybe responsible for a good chunk of the legit trading. Just info I have picked up along the way.

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So it assumed the rest is some form of speculation?

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Wheeler either sticks to his mandate as outlined in his PTA with English or he resigns immediately.

The RBNZ gets to call the shots on the OCR at the same time as it can buy and sell contracts....this is legalised insider trading is it not? The powers the RBNZ have been given have only the PTA to offer any balance on what trading activity can actually happen..

http://www.rbnz.govt.nz/statistics/f5

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does the world even need reserve banks...

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