The Reserve Bank's 'own goal'

Currencies

Roger J Kerr says so far the RBNZ's 50 basis point cut to the Official Cash Rate appears to be creating the exactly opposite effect to that intended on confidence

2nd Sep 19, 8:14am by Roger J Kerr

The NZ dollar slid lower against the US dollar over this past week to new four-year lows, pushed down by the ongoing US/China trade wars, dismal NZ business confidence results and a stronger US dollar to below $1.1000 against the Euro.

Prior to the last week, the Kiwi appeared to be finding some support between 0.6400 and 0.6450 following the “front-running” and surprise 0.50% cut in the OCR earlier in the month. However, that tentative support caved-in and the NZD/USD exchange rate dipped to a low of 0.6285 on 31st August.

The local FX market certainly reacted negatively to the media headlines on 29th August that local business confidence had plunged further to levels of negativity not seen since the GFC in 2008/2009.

In slashing the OCR interest rate by 0.50% to 1.00% on the 7th of August, the Reserve Bank of New Zealand stated that they wanted to stimulate business investment and confidence by making the cost of debt cheaper.

So far, it seems that they have scored an “own goal” and achieved the exact opposite.

In surprising everyone and taking what appeared to be drastic action in easing monetary policy, the RBNZ gave the impression to many in the business community that something was seriously wrong with the economy and things were going to become much tougher going forward.

Rightly or wrongly, the RBNZ were signalling that they knew something bad was on the horizon for the economy that the rest of us were unaware of.

Hence the further drop in business confidence levels following the RBNZ’s interest rate cut.

Whilst the initial reaction by the FX markets was to sell the Kiwi dollar on the poor business confidence outcome, standing back from the daily news buzz reveals that the monthly ANZ business confidence survey has been a very inaccurate lead-indicator or predictor for economic activity levels over the last 18 months.

GDP growth has held up well at +2.50% over the last year despite the uncertainty of the trade wars and constant warnings from economists that the economy faces severe headwinds.

Manufacturing is one industry in New Zealand that has declined as the US tariffs cause all business expansion plans to be put on hold by customers around the world.

Export log prices did fall in July, however that was primarily due to a financing scam inside China with timber importers/wholesalers. Underlying demand for NZ logs does not appear to have reduced.

Activity levels across the rest of the economy in agriculture, retail, tourism and construction have not fallen away as some would make you believe.

Recent employment, building consents and retail sales data for the June quarter have been reasonably positive.

The New Zealand economy has held up very well over the last 12 months with still elevated export commodity prices underpinning the moderate expansion.

The very low business confidence levels are not about worries of weakening demand in the economy, instead they reflect business folks’ combined frustration with Government policy changes on regulation, employment laws and immigration. The uncertainty from the global trade wars also contribute.

Business confidence tumbled following the Labour-led coalition government coming to power in late 2017 and it has never really recovered. Low business confidence can become a self-fulfilling prophecy that pulls economic activity down, however to date that has not occurred. The low business confidence levels are unfortunately stemming from the actions of politicians and others in Wellington.

The implications for the Kiwi dollar from this misrepresentation of the true state of the NZ economy, is that at 0.6300 it is arguably under-valued vis-à-vis our economic fundamentals.

However, a recovery in the NZ dollar cannot occur until either the USD weakens, or the trade wars are resolved. The overall exchange rate value as measured by the TWI Index is now below 70.5. The current RBNZ economic forecasts over the next three years are based on the TWI averaging between 72.4 and 73.4, thus monetary conditions are already much looser than intended.

AUD outperforms the NZD, further gains likely

One of the reasons behind the NZ dollar sell-off over recent weeks has been the unwinding of speculative NZD/AUD FX market positions.

The NZD/AUD cross-rate has reversed sharply from highs of 0.9700 on 6th August to 0.9370 with the speculators selling the NZD against the AUD to unwind.

The NZD/USD rate has certainly underperformed the AUD/USD rate since the RBNZ cut the OCR. Looking ahead, Australian economic data being released on Tuesday 3rd September may well prompt further AUD gains ahead of the NZD.

Australia will record their first Balance of Payment Current A/c surplus since 1975 for the June quarter.

The Aussies are also on track to Government budget/fiscal surpluses as well. So, if it was not for the current global economic uncertainties caused by the US/China trade wars, the Aussie dollar would be posting serious currency gains against all currencies. Against its much-improved economic fundamentals the AUD would also have to be regarded as undervalued against the USD. The AUD/USD exchange rate is currently stable around 0.6750 against the USD, holding steady despite recent USD gains against the Euro.

US employment numbers key metric for the Fed

A slight thawing of trade tensions between the US and China since the blow-up in May sees them return to the negotiating table this month. However, an agreement on technology transfers and intellectual property seems a way off whilst import tariffs are both implemented and increased by both sides.

Global FX markets will be focusing on the next US employment data for the month of August on Friday 6th September. A monthly increase in new jobs below 160,000 will increase the chances of the Federal Reserve aggressively cutting their interest rates at their FOMC meeting on 18th September. The long-awaited USD weakness on world currency markets may then finally start to emerge.

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Source: RBNZ

Source: CoinDesk

*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.

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47 Comments

by grant936 | 2nd Sep 19, 8:40am 1567370457

The headline on this article should be: How I got it wrong and advised my clients to hedge at 67/68 to the dollar because the Kiwi will shortly be in the 70's.....

Of course whilst the Chinese authorities keep on weakening the CNY - the Kiwi and Aussie will continue to be held down and again interest will be heightened today with the CNY fix, now that both China and the US have introduced fresh tariffs as of 1 September - something which will now hit people like Apple, so it's staring to get interesting - will Trump blink or double-down?

If he blinks, Kiwi to soar, however if the War worsens (let's all watch HK) - Kiwi could very well be sub 60 or just about there come year end.

Either way - highly unlikely that the Kiwi will be at this level in a couple of months high - it will either be up in the high 60's or down in the high 50's - but what will it be?

by mikekirk29 | 2nd Sep 19, 8:47am 1567370856

NZD is tied to Yuan value, which is crashing because CCP is trying to devalue, just as Mr Orr was.
Interest rate cuts were to try to get people in NZ to borrow and buy houses, because such growth stalled a year ago. In addition, inflation is wanted and devaluing currency is a good way to import this. The GDP and business confidence is a complete red herring. Central banks are interested in a chain rate of inflation to erode debt and prevent deflation. The economy per se, is NOT their prime concern, merely their rhetoric. NZD will continue falling because Yuan will and China is losing war on trade.

Also, can your writers, esp Mr Chaston please stop quoting CCP figs like they are facts. They are propaganda.

by J.C. | 2nd Sep 19, 2:05pm 1567389945

Great post, but I think the economy is the RBNZ's concern. They believe that if debt is cheap, this will incentivize the masses to spend. This stimulates the economy (and GDP) as the consumption composition of GDP is most important to the economy.

by Brutus Iscariot | 2nd Sep 19, 9:11am 1567372295

Don't question the Tree God.

by Peri | 2nd Sep 19, 9:25am 1567373122

The headline is spot-on. The lowering of the Official Cash Rate is creating exactly the opposite effect to that intended.
But this does not relate only to business confidence. The lowering tells us that the RBNZ is very concerned about what lies ahead. For this reason it is rational that those on fixed income will spend less, people heading for retirement (all of us?) will save more, and those with mortgages will pay down their debt faster .

by Fritz | 2nd Sep 19, 9:57am 1567375026

'The lowering tells us that the RBNZ is very concerned about what lies ahead. '

That's what I had thought previously, but my view has changed a bit.
I now hold a more cynical view that the move relates to bolstering the property market, because the RB know how reliant the NZ economy is housing.

by RickStrauss | 2nd Sep 19, 2:03pm 1567389834

If that's the case it's a pretty abhorrent situation. Choosing to throw pensioners and younger saving Kiwis under the bus to prop up one segment's investment portfolios would be pretty dodgy governance.

by Fritz | 2nd Sep 19, 2:44pm 1567392279

If it's occurring I think it's a bit more indirect than I alluded to.

by J.C. | 2nd Sep 19, 2:09pm 1567390166

and those with mortgages will pay down their debt faster .

I disagree. People only pay down debt faster if they have the means to do so. If they do this, it further removes spend into the consumer economy. Double-edged sword.

by Wilco | 2nd Sep 19, 9:40am 1567374053

'Misrepresentation of the true state of the NZ economy'
Roger - yet again - is looking for reasons to justify the NZD going higher.
But perception is reality.
My dairy and beef income for this year will be well above the 5 year average. But I will be spending less.
As a farmer I am constantly being vilified in the media. Large parts of the population no longer appreciate our contribution. It is no longer seen as an honourable vocation by many. And our leaders have let us down.
So guess what? I am pissed off and I have lost confidence. So what am I and probably a number of farmers across NZ doing? We are focusing on reducing our exposure. Better to pay our mortgage down than spend.

by Kezza R | 2nd Sep 19, 9:56am 1567374970

I dabble in property and was slandered with the CGT press. A loss of faith in this Gov't is about where that left me.

by kane02 | 2nd Sep 19, 1:27pm 1567387676

you are not the only industry to feel the wrath of the government. many other sectors are in the same boat and have adopted a similar philosophy. Pay down debt, save. Screw the government, and their Jedi mind tricks.

by Kezza R | 2nd Sep 19, 7:09pm 1567408148

That's starting to sound like a fair smack of people aren't spending. That equates out to a loss of dollars floating arround which in turn leads to a lack of jobs.

by Good Samaritian | 2nd Sep 19, 10:41am 1567377686

Wilco...You're on the money.

The reducing cash rate has the effect of a reduced exchange rate, that will benefit our exports. And being an export driven economy, that's where the focus should be.

I wouldn't and don't believe most things ANZ or their ilk propagate. It largely self interest, given a lower exchange rate has the effect of reducing their profits to the mothership.

Some think the US are winning this trade war. Its not so. With the population China has, and lower cost of production they have, their economy can feed on itself for a much longer time. In addition, what the ruler says goes. US don't have those luxuries. The days the US is a world reserve currency are numbered, and they know it. Russia's forward trades with Europe are in Euro; a sure sign of things ahead.

The US economy has been stuffed by the corrupt public company executives chasing short term bonuses for themselves, at the expense of US Inc.

by kane02 | 2nd Sep 19, 1:23pm 1567387402

I heard from a leading property developer yesterday that the AKL market is very very flat. Houses are NOT selling. There is a major affordability problem, and lack of confidence. This has been exacerbated by the fact that the banks are running scared, and are applying far stricter affordability measures.

a 50 basis point cut is/was futile.

The State should have slashed tax rates two years ago.

by J.C. | 2nd Sep 19, 2:11pm 1567390315

In all reality, the banks should be scared. 70% of their revenue and profit is derived from the bubble.

by Fritz | 2nd Sep 19, 2:31pm 1567391484

I do several things for a living, including working in the advisory space on urban development. You are right and that has been developing for 6-9 months.
I suspect that the buildings consents data is painting a false picture.

by kane02 | 2nd Sep 19, 5:55pm 1567403758

you are correct Fritz. The drop off has occurred over the past 6 months or so. Given the government is highly reliant on the property sector for gst, and it is a huge component of gdp (roughly 50%) things are going to get bumpy. I expect to see layoffs within council shortly too as the construction pipeline falters.

by Fritz | 2nd Sep 19, 7:04pm 1567407899

In recent years, there has been a close match between building consents issued, and COCs - so the building consent data has been a pretty good indicator.
I suspect a divergence will start to appear, where fewer and fewer projects that get building consents will get built.
That's one of the reasons why the building consent data is now painting a false picture.

by Carlos67 | 2nd Sep 19, 3:36pm 1567395390

kane02 I seem to remember that Bill English was promising tax cuts if National got back in last election ? Instead we got even more taxed by the COL.

by kane02 | 2nd Sep 19, 6:03pm 1567404195

headwinds were building then Carlos, and the timing was right to cut tax rates. Unfortunately the COL went the other route, and 18 months later we are coming to a grinding halt. Opportunity lost. Sadly it shows that economically the COL have no idea, Anyone noticed how quiet Robertson has been of late. And WP is only interested in his personal vendetta with Bennett. Should have been put out to pasture years ago imho

by Fritz | 2nd Sep 19, 3:49pm 1567396195

Another story. A mid-sized developer I have done some work for told me a couple of weeks back that he has given up on Auckland.
The council is a nightmare, and in any event development isn't stacking up in terms of the financials.
There are still a few places around NZ where he's doing stuff and getting things to work, but he wouldn't touch Auckland with a barge-pole now.

by kane02 | 2nd Sep 19, 6:05pm 1567404333

we are still involved in a number of projects but are very picky, and have reduced exposure significantly over the past year.

by Fritz | 2nd Sep 19, 7:09pm 1567408166

Interesting, backs up my experiences and observations.
Are you focussing more on mid-high end projects? I think low-mid end is fraught (hard to build and sell at prices mid income people can afford, and hard to stack up for investors) as is high end (not as much hot or laundered money around...)
I think there's still a *little* bit of potential in that mid-high end range. ie. delivering 3 bedroom townhouses for circa $1.2 million in higher end suburbs.

by SmoKey | 2nd Sep 19, 1:30pm 1567387807

Why the Representatives of the Government, the Ministers, MPs, Treasury officials etc are silent on this.
Is Orr being given a long rope to do you know what ?
Mysterious indeed. RBA chief has come out with a differing statements about low and lower rates.
What is going on and Why ?

by kane02 | 2nd Sep 19, 6:13pm 1567404789

Simple, they haven't got a clue. Read the bio's of the key ministers in caucus and check out their backgrounds. Nothing to see. They are almost completely reliant on advisors, or working groups.

by Fritz | 2nd Sep 19, 7:11pm 1567408274

and many advisors, while often very bright in my experience, are often not subject-matter experts.

by Kezza R | 2nd Sep 19, 7:12pm 1567408323

Wellington has been awash with work since Jacinda started.

by Fritz | 2nd Sep 19, 7:27pm 1567409240

helped push property higher, no doubt.
The place is overflowing with senior 'policy advisors'

by Kezza R | 3rd Sep 19, 12:46am 1567428413

And their staff.

by Voiceofreason | 2nd Sep 19, 1:43pm 1567388610

I’m sorry, how is this a surprise? It’s been on the cards all year that interest rates were going down, down, down, along with the NZ dollar in the past couple of months. There’s zero surprise gold has risen double digit percentage over that time. Next we’ll be surprised to find out that the NZ property market was actually in a speculative bubble rather than a major supply shortage.

by Kezza R | 2nd Sep 19, 5:23pm 1567401783

Agree. The job losses from the lack of faith, global downturn etc have not made any impact yet. We know the issues are out there but there doesn't seam to be a great amount of people joining the dots that house prices fall will fall as a result yet. This tourisium season will be the big indicator. A lack of tourists will show us how the world is really shaping up and also bite us in the pocket hard.

by mikekirk29 | 2nd Sep 19, 1:39pm 1567388388

Saying it’s good for exports doesn’t wash. Import inflation erodes disposable income. So the chief driver of gdp will be eroded

by J.C. | 2nd Sep 19, 2:13pm 1567390384

Spot on.

by gingerninja | 2nd Sep 19, 2:32pm 1567391528

Honestly, i'm rolling my eyes so hard right now, they might do a 360. What a shocker!? Roger thinks NZD is underpriced, how very dare they and any minute now it's going into bull run against every other currency?

Since when has 18 months been enough to consider the economic value of a currency either? There are so many factors to influence currency value, Roger will just find whichever one to fit his narrative and invariably remain the NZD permabull.

by The_4th_estate | 2nd Sep 19, 3:51pm 1567396300

In my view it is disingenious to accuse the RB of an own goal when it could very easily be the previous government that infact booted the ball to the back of their own net on several occassions. The failure to stimulate housing construction post gfc, the failure to mitigate the out of control foreign investment in existing housing, the failure to maintain a decent living wage for wage and salaried employees, the failure to maintain economic momentum in provincial economies and the failure to develop a national economy that went beyond housing speculation and low value milk powder. The collapse in business confidence was always going to happen due to the inevitable running out of economic momentum due to a completely futureless set of policies overseen by Key's government. He of all of us knew it was coming and its why he quit so abruptly. The current coalition aren't to blame, they haven't been in power long enough for their policies to have any impact. All they are doing is trying to head off a complete collapse of the economy. They may be too late.

by Fritz | 2nd Sep 19, 4:08pm 1567397328

Great points. The Key government was brilliant at short-termism (and how cynical is that in terms of populism) and awful on the long term.
I suspect their legacy will be viewed dimly, in time.

by The_4th_estate | 2nd Sep 19, 4:42pm 1567399355

All the worse for it is that I supported the party, at least up to when the wheels fell off the regional economy in the BOP post gfc and post psa out break. We were asking the office of Mr Bridges no less about support for numerous projects, housing and other non roading infrastructure, aquaculture, tourism and he was hopeless, said he couldn't go against the party line of hands off government. Now he's asking for my vote and is campaigning against the provincal growth fund too, which just sums up the party in its entirety. Miserable and short sighted. Wheres the money?!

by Fritz | 2nd Sep 19, 4:51pm 1567399877

Where's the short term money?

by Fritz | 2nd Sep 19, 4:59pm 1567400387

I think the Nats have been bereft of any long term vision for a long time.
Key talked in slogans- closing the gap with Aus etc etc- but most of their actual policies ever did was enrich the top 10%.
It's not that they are to the right of centre that riles me. I am a bit of a political chameleon and can see potential merit in both left and right wing policies. It's more that their centre-right policies seem so non-strategic, and blatantly enriching the status quo.

by The_4th_estate | 2nd Sep 19, 8:46pm 1567413986

Nothing wrong with pulling the lens back away from partisan/bi partisan party mindset, it enables a critical appraisal of whats really happening and I, like yourself don't like what I see. I'm looking forward to the upcoming reboot of TOP political offerings, will NZ engage with it?

by Kezza R | 2nd Sep 19, 7:21pm 1567408883

The current coalition aren't to blame.....

Lab, NZF & the Greens dont inspire anyone to have faith that they will proform when the crap dose hit the fan. That takes the public view from 'this could be bad' to 'this is going to be a shocker and dont hold your breath for help'.

by JediNight | 2nd Sep 19, 6:20pm 1567405214

Why pay to borrow now when they'll pay you to borrow soon enough?

by Grant A | 2nd Sep 19, 8:18pm 1567412317

Where's that happened anyway in the world JediKnight other than Govts?

by sit23 | 2nd Sep 19, 10:45pm 1567421131

Could someone put up a graph that shows the historical correlation between Reserve Bank set interest rates and the rate of business investment rates. Possibly they could also show Mr Orr. At present, it looks as if he is just doing what his bosses at Jackson Hole told him to do, and put NZ in the same bad position as a lot of other badly run countries.

by fat pat | 3rd Sep 19, 2:30am 1567434608

We're well and truly in financial repression territory now. The heavily manipulated US inflation rate is above the US 10 year rate, and same's true in NZ. 10 Year NZ government bond = 1.07% Official NZ inflation = 1.7%. No wonder gold is doing well.

by i am not a nimby | 3rd Sep 19, 9:30am 1567459808

Artificial sweetners to lower the NZ Dollar will lead to unintended consequences such as springing back up with a vengeance. let the dollar float otherwise its no different to having a pegged currency.