By Roger J Kerr
On the surface, the 151,000 jobs increase for the month of August in the US was a disappointing result against the prior consensus forecasts of +180,000.
However, it must be remembered that historically August has always been a low month for new hires due to the summer holiday period.
Whilst the outcome was less than the US dollar bulls were expecting and thus put an immediate dampener on the probability of a rate hike in September, the USD did not weaken against the Euro after the data release. The employment number was not weak enough to cause USD selling in the forex markets.
As has been previously stated in this column the FX markets always price the future expectations today and that even if the timing of the next US interest rate increase is December rather than September we should still expect a strengthening US dollar value now.
It is instructive that the EUR/USD exchange rate remained below $1.1200 despite the marginally lower jobs result and weaker manufacturing data in the US last week. My view is that the EUR/USD rate will still head to under $1.1000 over coming weeks as the markets start to factor in the reality of tighter monetary conditions in the US and further loosening of monetary conditions in Europe by the ECB.
A stronger USD on global markets from here reinforces the cap on the Kiwi dollar at 0.7300, however USD strength alone may not be enough to force the Kiwi back below 0.7000 as we have been forecasting. It needs something extra to trigger and force a lower NZ dollar trend.
The NZD/USD rate has returned to its resistance level at 0.7300, pushing up the TWI index to 77.80.
The overall New Zealand currency strength makes a mockery of the latest RBNZ inflation forecasts already. Tradable inflation will continue to print significantly lower than RBNZ forecasts over the next six to nine months due to the current exchange rate strength. The exchange rate movement upwards since the 0.25% OCR cut by the RBNZ on 11 August just tells you that the markets believe the RBNZ is not doing enough to force New Zealand’s exchange rate lower to get inflation higher.
This column raised the need for a surprise 0.50% cut a month ago.
FX market developments over the last four weeks tells us that the RBNZ should have been much less timid in their approach in early August.
Slow, measured and cautious changes from the RBNZ are just not working to get the currency/inflation results they themselves desire and require.
The reality is that the RBNZ have allowed official interest rates in New Zealand to remain 0.50% above the Australian OCR levels all this year, resulting in the NZD/AUD cross-rate zooming up from 0.9000 to 0.9600 as FX traders/investors are still attracted to the higher yielding Kiwi dollar.
The currency dial needs to be shifted.
Unfortunately we do not have a central bank with the will or capability to do that currently.
Fears from the RBNZ that lower official wholesale interest rates would put more fuel on the housing market fire have proven to be unfounded as the banks have not fully passed through lower OCR rates into their lending interest rates as their own cost of funds have not really reduced. Bank retail deposit rates have actually increased and bank wholesale borrowing margins (credit spreads) offshore continue to increase as well.
The ball is firmly in the RBNZ’s court to surprise the markets with another 0.25% cut to the OCR on 22 September to get traction in the FX markets for a lower Kiwi, particularly if the US Federal Reserve do not hike their interest rates on 21 September. A failure of the RBNZ to act in this fashion could see the NZD/USD rate at 0.7500 and the TWI at 80.0 and even more pressure on themselves with a massive, prolonged and unacceptable inflation miss.
A reliable measure of whether the NZ dollar value is out of whack with our economic fundamentals is its value relative to the Terms of Trade Index (import/export prices). The chart below is self-explanatory in that the TWI Index has increased over a period the Terms of Trade Index has decreased, thus the recent currency gains do not look sustainable.
Daily exchange rates
Select chart tabs
Roger J Kerr contracts to PwC in the treasury advisory area. 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
27 Comments
This writer continues to beat the same drum. Virtually the last 4 cuts the exchange rate has increased! By now everyone including the RB should be aware that what we do matters not - its the US moves (or lack of them) that drives our dollar. We should be doing nothing with the OCR - record employment, immigration, tourism, construction, dairy prices increasing and so on...Inflation is irrelevant as it is now affected by global events (technology etc) outside our control. Our exchange rate is where it is because the rest of the world recognises we are tracking very well against them - its a shame local commentators cant see it.
The drum beat does get tiresome from the writer. There have been 6 cuts to the OCR since mid June 2015 - and yes there was some decline in the exchange rate on the first two cuts but the facts show that the NZ/US exchange rate and the Trade Weighted Index are now higher today than they were six cuts ago.
What the six OCR cuts by the RBNZ have done is to fuel the housing bubble - enticing more overseas investors and speculators to purchase NZ houses - and in the process drive up the exchange rate.
Oracle,
A debt to income ratio seems eminently sensible to me, but just how powerful a tool do you think it would be right now? I understand that investors are responsible for some 46% of sales and if that is correct, how severely would they be affected? At what level would you set it? A max. of say 6 times income?
PS. Ratios as a plural has no apostrophe. Forgive my pedantry.
You don't want to apply this to investors, the LVR is the tool you use to restrict them. If you get rid of investors, who will provide rental properties? Not everyone can or should buy and rental properties are vital. The LVR's slow investors gearing up and buying more properties. DTI ratios will stop owner occupiers from bidding up the prices because they can afford the repayments due to low interest rates. They need to be very careful they don't further exclude first home buyers.
It would be extremely powerful. It would create a pretext whereby hard work & education is valued in society, rather than speculation. It had a huge impact in the UK & there is always a way to address such matters: http://www.zerohedge.com/news/2016-08-21/vancouver-housing-market-implo… There is clearly no political will to address the issue so the RBNZ has to grow a backbone. After the crash, the brain drain will ramp itself up - people only want to be in NZ when the standard of living is high & that can turn on one event. It's really careless of the NZ government, their failure to even acknowledge an issue (when AKL is c.12 times income) is cronyism & disgraceful.
PS: The plural comment is a welcome correction to my vocab, albeit superfluous nowadays with spellcheck ;-)
Is the concern with the rising value of the NZD/USD pair, rather than the collapse in respect of NZD/JPY, cover for an egregious agenda calling for lower interest rates to help pull expected asset related future cashflows forward to capitalise today? The $value of many derivative contract marked to market valuations could depend upon this reality.
No, low interest rates bring consumption forward, not capital flows!
The thought of an issue with a counterparty derivative is one that makes world finance cringe! It has been noted that Deutsche bank has reneged on physical delivery of gold in recent days. If Deutsche sneezes, the world catches.
Stephen... u might be interested in these comments ( referring to USA mkts ):
"If we have borrowed more from our future than any time in history and markets value the future, we should be selling at a discount, not a premium to historic valuations.
It is hard to avoid the comparison with 1982 when the market sold for 7x depressed earnings with dozens of rate cuts and productivity rising going forward .... vs...... 18x inflated earnings, productivity declining and no further ammo on interest rates. '
Again if banks dont pass on the cuts then whats the point? My bank told me that due to increased borrowing costs offshore they could not pass on the savings of course this could be a load of BS. However they did only pass 5 basis points of the 25 cut(ANZ dicks) so does mean an OCR cut is not as effective.
I also think this growing debt bubble is going to hamstring the economy long term. If we are in for prolong low interest rates and this sees borrowing increasing then when interest rates go up its going to hamper growth.
My question, how will New Zealand , specifically benefit from a lower NZD. How low , is the correct NZD , and what data supports the view that at a certain point New Zealand will benefit from such a lower currency. Again , we have this apparently simple rationale for improving our economic outcome, lower interest rates, lower currency , higher inflation, without a single commentator showing how having a 'weaker ' currency will specifically help. Are weak currencies helping South Africa , Venuezela or indeed Argentina. Australia seemed a pretty happy place when their currency was 1.20 USD.
in short it is good for selling our products offshore, so we can get an income from offshore.
also good for encouraging tourists to visit here and bring there money into the country.
you could argue if we produced something that the world wanted really bad they would pay a premium to own it or to visit but NZ is stuck in the volume not value track, classic example Fonterra against nestle, two of the biggest dairy companies in the world, one supplies mostly raw materials the other is at the other end manufacturing products for sale at a higher margin
Sharetrader, I could argue that we import a multitude of necessary goods/services that we have no ability /willingness to produce in New Zealland.How would a lower currency impact New Zealand, including the need to import intermediate goods to produce those exports including milk powder. Would a lower currency help us create the next ipad or antibiotic or fly us to the moon. At present , close to zero chance. I could argue that our 'high' currency has not prevented tourists from arriving , far from it, and indeed there has been a timely increase in international students as our currency has' increased'. I could argue that our present migration numbers are driven by those who are happy to work in 'low' paying jobs , with the full knowledge that when that income is repatriated , it makes perfect sense to come to New Zealand. In terms of benefits of a low currency, the lag period and flow on effects of increased exports is grossly overstated and misunderstood , but it sounds good. However , you did in part answer my question, 'if we produced something that the world wanted really bad.'If we want a lower currency, we can do what Iceland have done.
So, Roger wants the OCR cut and preferably aggressively. Of course,it's not that long ago since he wanted to see the OCR raised aggressively,but we'll let that pass.
Apart from the inconvenient fact that what we do is almost irrelevant,why should we cut rates at all when our economy is doing reasonably well and growth seems likely to exceed 3%. Of course, I am well aware that on a per capita basis, growth is almost flat, but nonetheless, that wouldn't signal the need for a rate cut. Ok, a signal of no further cuts would push the $ higher and there would be some effect on exporters,but when we finally see another hike in US rates,any rise would almost certainly be erased. What about the house market? Well, interest rates should not be the primary tool for constraining that market anyway. Loan to income limits, stamp duty, pushing out the 2 year capital gain period to say 5 years and various other measures can and should be used.
Roger, listen carefully; another rate cut will not achieve the effect you want.
Lets think that maybe the sole purpose for Roger in his articles is to try and manipulate opinion for his foreign currency trades. This is obvious by his flip-flopping views that are totally inconsistent over time. Take it all with a grain off humorous salt and remember that you would be remiss to make any financial decisions based on this or any sole commentary.
Personally I would look forward to a massive drop in the $NZ, as I would definitely consider buying more NZ real estate with the $US. Roll it on. I salivate.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.