Roger J Kerr says the Reserve Bank finally got the NZ dollar to behave the way it wanted

By Roger J Kerr

There were two events last week that were destined to have a significant short-term impact on the Kiwi dollar if the results were not in line with what the FX markets were expecting beforehand. 

The dairy GDT auction last Tuesday had no impact as prices remained stable, whereas there were some indications that Chinese warehouses were full up of milk powder and buying demand may have been waning.

That proved not to the case, however US supply onto the globally traded dairy market should prevent any further price increases over coming months.

The second event, the Reserve Bank of New Zealand’s Monetary Policy Statement, did however cause a major reaction on the local financial markets as Governor Graeme Wheeler hinted in a very subtle way in the statement that the markets were well ahead of themselves in pricing interest rate increases later this year.

They reduced their 2017 inflation forecast as anticipated and kept the same forward OCR interest rate assumption as December.

The NZD/USD rate tumbled from 0.7350 to below 0.7200. For once, the statement from the RBNZ caused the FX market result they desired, as a pattern developed last year of every RBNZ utterance forcing the Kiwi dollar upwards, opposite to what they wanted. It was very difficult for the RBNZ to deliver an overtly dovish economic outlook when the NZ economy is performing so well.

The statement was well balanced on the economic outlook, however the critical importance of the exchange rate level to the economy was recognised and exporters will be relieved at the NZD/USD rate deprecating and other cross-rates falling as well.

The US dollar itself has regained some ground against the major currencies as we expected with the global markets reacting favourably to messages from the new Trump administration that tax cuts in the US are coming.

The markets will also be eyeing the latest Trump discussions with Chinese and Japanese leaders as more rational than earlier campaign pledges and thus geo-political risk tensions/risks have reduced somewhat.

The US dollar has strengthened from $1.0800 against the Euro to $1.0630 over the last two days.

The NZ dollar has tumbled from highs of 0.9650 against the Australian dollar only a week ago to 0.9370 as the Kiwi depreciated on its own accords following the RBNZ statement.

Finally, the NZD/AUD cross-rate has pulled back as it has a historical pattern of doing, only the period of time above 0.9400 over recent months has been longer than normal. I

t was always expected that speculators holding long NZD positions against the AUD would ultimately take their profits and unwind their positions by selling the Kiwi against the Aussie.

The three cent fall in as many days has come about as the markets finally realised that New Zealand will not necessarily be increasing interest rates ahead of Australia in timing later this year.

The reasons for buying the Kiwi up against the Aussie dollar had disappeared. Expect to see the NZ dollar underperform the AUD over coming weeks/months (lower NZD/AUD) as commodity price and interest rate differentials still favour the AUD.

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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

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2 Comments

t [sic] was always expected that speculators holding long NZD positions against the AUD would ultimately take their profits and unwind their positions by selling the Kiwi against the Aussie.

The three cent fall in as many days has come about as the markets finally realised that New Zealand will not necessarily be increasing interest rates ahead of Australia in timing later this year.

Too true, both countries are running an officially sponsored residential property ponzi scheme that would roll over if challenged with higher interest rates.

BIS has publicly noted the symptoms and causes.

A monetary policy regime narrowly focused on controlling near-term inflation removes the need to tighten policy when financial booms take hold against the backdrop of low and stable inflation. And major positive supply side developments, such as those associated with the globalisation of the real side of the economy, provide plenty of fuel for financial booms: they raise growth potential and hence the scope for credit and asset price booms while at the same time putting downward pressure on inflation, thereby constraining the room for monetary policy tightening. Borio page 12 of 38.

And:

More importantly, the banking system does not simply transfer real resources, more or less efficiently, from one sector to another; it generates (nominal) purchasing power. Deposits are not endowments that precede loan formation; it is loans that create deposits. Money is not a “friction” but a necessary ingredient that improves over barter. And while the generation of purchasing power acts as oil for the economic machine, it can, in the process, open the door to instability, when combined with some of the previous elements. Working with better representations of monetary economies should help cast further light on the aggregate and sectoral distortions that arise in the real economy when credit creation becomes unanchored, poorly pinned down by loose perceptions of value and risks. Borio Page 17 of 38

The effect will be short-lived and it will correct when the reality filters through