By Alex Tarrant
The Reserve Bank says the New Zealand dollar is stronger than it wants to see, and has hiked its projections for the currency over the next few years.
In its December Quarter Monetary Policy Statement, the Reserve Bank projected the Trade Weighted Index - showing the New Zealand dollar against a basket of trading partner currencies - would maintain its level above 71 through its projection period to the March 2015 quarter.
The December MPS showed a big shift from September projections, which showed the TWI falling below 70 midway through 2014.
The currency rose by almost half a US cent on Thursday morning following the release of the Reserve Bank's latest forecasts.
Reserve Bank Governor Graeme Wheeler said the exchange rate was stronger than the Reserve Bank wanted.
“We would like to see the exchange rate lower, if we could achieve it without threatening the inflation outlook and also financial stability," Wheeler told media at a press conference at the Reserve Bank on Thursday morning.
“If you look back over a long sweep of history, there’s a close relationship with the terms of trade. But we’ve seen the terms of trade decline now, for five quarters - commodity prices are starting to pick up, and they’ve picked up over the last five months or so. But you see the exchange rate remaining very strong, and doing considerable damage to the traded goods sector, particularly manufacturing and also import-substitution," Wheeler said.
The high currency had been driven a lot by injections of global liquidity – that is, quantitative easing – from the major economies.
“There seems to be a close relationship between the pick-up in overseas share markets – world share indices, particularly in the US – and a pick-up, in turn, in the exchange rate pressures faced by countries that have reasonably sound monetary policy, good growth prospects, and reasonable prospects in terms of commodity price outlooks," Wheeler said.
Asked if the Reserve Bank had looked at ways to mitigate the effects of global liquidity injections, Wheeler replied:
“In terms of the liquidity injections that are coming from overseas, those sorts of pressures, there’s not a lot directly that we can do about that.
“The issue is, what can we do to try and alleviate exchange rate pressures? There are circumstances in which the central bank could intervene, but we’ve yet to find situations which meet all our ‘traffic lights,’ if you like, at this point.
“Other governments have looked at capital controls. We don’t think that’s appropriate for New Zealand," Wheeler said.
“So in essence, it’s something that a lot of countries that have better growth prospects and have rising commodity price outlooks and reasonably sound macro policy, they’re facing upward pressure on the exchange rates And it is hurting their traded goods sectors in many of their economies," he said.
Monthly average exchange rate
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7 Comments
The RBNZ started doing Financial Stability reports back in 2004. A very large question has to be asked over the effectiveness of these reports. Did the RBNZ see the GFC coming? Did the RBNZ see the high exchange rate emerging? Did the RBNZ think the high household debt would have implications on the economy? Basically the RBNZ watches the banks and hopes that it all works out OK.....Do hope the RBNZ gets a good shareholder dividend from the Fletcher shares they hold.....a rather sneaky little investment by a Crown entity getting a lovely Government handout with managing the EQC repairs.
I don't think the RBNZ financial stability reports assist in any way or function. They just tell us what we already know.
@notaneconomist +1.....
One way to look at the high NZD is that we have had a wage rise (if you have a job)....more purchasing power.
Use them to buy things of value. While we can.
Cheers
BNZ just published they expect the NZ$ to be higher for longer:
We’ve revised up our NZD/USD forecasts for the second half of 2013. Previously, we expected the currency to gradually head lower through this period. We now see less chance of this occurring and have lifted our end-2013 forecast from 0.7800 to 0.8100 accordingly. Our pre-June 2013 forecasts remain unchanged. It’s not a story of additional marked strength in the currency, more a stronger for longer view.
A fortnight ago we acknowledged the fact consensus growth forecasts for NZ’s trading partners posed serious upside risks on our expectation the NZD would trend lower from late 2013 (see chart).
We’ve now more formally recognised this risk in our NZD forecasts. This is because, looking across a broader range of NZD ‘fundamentals’, it becomes increasingly hard to justify a sustained move lower in the currency next year.
Commodity prices supportive
We’ve long held a constructive view on NZ’s commodity export prices. This week’s ANZ commodity price index for November rose 1%. This was the fourth consecutive monthly improvement and takes prices to 6.5% above July levels. More importantly, we remain of the view that NZ commodity prices are likely to keep heading higher over the coming 12 months, reflecting tightening global supply and an improving world economy. As shown in the chart, this is a recipe for on-going strength in the currency.
Relative growth skewed in NZ’s favour
The relative growth story has also moved in favour of a higher NZD in 2013. The effects of anticipated US fiscal tightening have (finally) taken a toll on 2013 US growth forecasts. The Bloomberg consensus now expects growth of just 2% for the US in calendar 2013, down from the 2½% expected around the middle of the year. Coupled with our expectation of a slow and steady pick-up in NZ economic growth, this leaves us with a picture of relative growth remaining skewed in NZ’s favour next year.
No impediment from the RBNZ
The tone of this morning’s RBNZ Statement leaves us even more comfortable with our higher NZD view. If the Bank was ever going to shift to an easing bias, or at least flag the possibility of rate cuts in future, it was today. The fact that they didn’t betrays a clear reluctance to cut rates. Clearly, the RBNZ has faith in its forecasts for a pick-up in NZ growth and inflation next year. This less-dovish-than-expected view has already provided a boost to the NZD/USD, and we suspect more could be in store as the interest rate market prices more easing out of the curve.
It is also notable that the RBNZ made no attempt to jawbone the currency lower this morning and in fact revised up substantially its forecasts for the NZ TWI (see chart). The recent push higher in commodity prices has likely left the Bank a little more relaxed with the high NZD. After consistently having a stronger currency view than the Bank for the past year or so, our forecasts are now more or less in alignment.
NZD downtrend a 2014 story
We still expect a sharp widening in NZ’s current account deficit to weigh on NZD sentiment next year. It’s just that the supportive factors outlined above are sufficient to offset this effect in our forecasts.
In any case, more of the widening is expect to occur in 2014. This is also about the time relative growth should flip from being a NZD positive to a negative. As ever, this depends crucially on the US recovery finally picking up steam.
Valuation effects will also start to become problematic for the currency in 2014. According to our terms of trade-adjusted purchasing power parity model, the NZD/USD will have been ‘overvalued’ for around 3½ years by 2014, with around half of this overvaluation being by more than one standard deviation.
In Summary
Current global growth forecasts may yet prove overly optimistic given the risks at play. And the US economy may surprise everyone and spring back to life next year. But, the way things stand at the moment, the fundamental backdrop is shaping up as supportive of a stronger for longer NZD/USD next year. If this view is to be believed, dips in the NZD/USD should continue to be viewed as buying opportunities. In the short-term, the key support level remains 0.8080.
But, but, but ....
You can't be serious. TSY is relying on on the NZD falling to USD 0.65 (return to surplus and all that). And MPI believes TSY. Which is why MPI has a positive outlook for NZ dairying (to be fair they have a negative outlook if the NZD remains high but they consider that a remote possibility):
http://www.mpi.govt.nz/Default.aspx?TabId=126&id=1356
And why numerous irrigation projects are proceeding based on a reasonably high dairy payout dependent on a steadily falling NZD:
http://www.hbrc.govt.nz/HBRC-Documents/HBRC%20Document%20Library/Ruatan…
This information from the RBNZ suggests that the front right wheel of the economy is now held by only one wheel nut, and that is coming loose. And this is SH 50 late in the afternoon - in the next 20 minutes you will pass 6-10 Fonterra tanker units travelling in the other direction.
Take care.
So we're just going to sit by and watch industries destroyed and people unnecessarily unemployed; for the benefit of workers in China, Japan, Germany and other surplus countries that do not have such a passive view.
RBNZ has "financial reports" galore to tell them of the dangers present and ahead . Unfortunately it chooses to do nothing as not all the "traffic lights" are align....maybe the lights from the ambulance is a better guide ???
Or perhaps it is choosing to follow Confucious advise : "When rape is inevitable, lie back and enjoy it "
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