NZD jumps 'for no good reason'

Currencies

Markets uncomfortable with lower AUD or NZD; today's focus will be inflation expectations

25th Feb 14, 8:04am by bnzeconomists

by Raiko Shareef

NZ Dollar

The NZD/USD was one of the top performing major currencies overnight, up 0.6% to around 0.8340.

The move higher seems to be in sympathy with the squeeze seen in the AUD/USD in the early hours of this morning.

While this gain was a product of positioning (as opposed to news-driven), we suspect that the currency will hold on at these levels.

Yesterday had seen a test of short-term support at 0.8260, but the NZD/USD is now comfortably back within the 0.8280-0.8380 range.

There seems to be little on the immediate horizon that would provoke a shift higher, and the market is clearly uncomfortable with venturing below 0.8260. Barring any serious data surprises, we see the NZD/USD dominated by range-trading for the week.

Today sees the release of the ANZ’s Regional Trends Survey for Q4, of which the activity measure can bear some resemblance to GDP.

But more attention will be paid to the RBNZ’s inflation expectations survey, also due today. The key number is the 2-year-ahead measure, which was at 2.3% last read, stubbornly above the 2.0% midpoint of the RBNZ’s target.

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Majors

Most major currencies gained against the USD overnight, with the AUD outperforming.

Both the AUD and NZD traded fairly listlessly over the New Zealand day on Monday, and looked to have a slight bias to push lower. But after a modest recovery later in the evening, the AUD suddenly popped higher for no good reason at all.

It seems as though investors who were betting on a weaker AUD/USD had orders to stop out from those positions just above the 0.9000 mark. This rush for the exits caused the squeeze, and the AUD/USD sits 0.7% higher this morning at 0.9040.

German business confidence improved by more than expected in February, with the IFO business climate survey rising from 110.6 to 111.3 last night. This result is consistent with a steady but unspectacular recovery in Germany. Separately, Eurozone inflation for January was revised higher from 0.7% y/y to 0.8%. Neither of these (marginally positive) outcomes made a lasting impression on the EUR/USD, which seems to be weighed down by dovish rhetoric from the European Central Bank. The EUR/USD is effectively unchanged at 1.3740.

US manufacturing data released early this morning was largely ignored. Any weakness in tonight’s US consumer confidence data will also likely be dismissed as weather-related. Elsewhere, the UK’s CBI retail sales data are due, with the market expecting a slight improvement from January.

Other news:
* Chicago Fed National Activity Index printed at -0.39 in January vs -0.20 expected.
* Dallas Fed Manufacturing Activity dropped to 0.3 in February vs 3.0 expected.

Daily exchange rates

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Source: RBNZ

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19 Comments

by Boatman | 25th Feb 14, 9:43am 1393274585

"NZD JUMPS FOR NO GOOD REASON " this headline is a good way to describe whats going on . It makes no rational sense.

We are becoming far too comfortable with a strong Kiwi$ and low interest rates , and that poses risks to our soft commodity export driven economy .

The fact remains , the Kiwi$ has to fall at some point , because apart from big spending on construction , our economic fundamentals have not changed much since 2008/9

We are still running a large deficit being funded by borrowing
Many people continue to live beyond their means
We have still got too much household and farm debt (at low rates )
Savings levels are abysmal
Many sectors are not doing that well including retail and export-driven manufacturing ( exlcluding dairy which seem bullet-proof)
While "employment " figures look good there is significant under-employment
Figures are hiding the fact that labour has been casualised and many people only find work for a few hours a week .
The strong Dollar is masking inflation, and this will change when the currency falls , the tide goes out leaving us exposed .

I suspect that if the RBNZ sees fit to increase the OCR , the problem could get worse as the curency gets stronger and we get to parity with the Aussie $ .

We then lose all pricing advantage in Aussie markets.

by Boatman | 25th Feb 14, 10:31am 1393277513

The level of savings of $120bn is not the full picture , it includes saving by foreigners and corporates such as Fonterra , and parastatal enterprises such as power companies and water-care , etc .

Kiwisaver while it is savings , is not accessible money , its for retirement , and actually equates to about $4k per individual which hardly a months expenses for an Auckland family, so it would last 4 months , and is still way below Aussie levels .

The household assets story is something else completely.

Houses should be excluded , as everyone has to live somewhere , so your home is not an asset in the investment sense , but rather a functional asset .

A huge chunk of this asset number is in over-valued houses , and one wonders whether that is net of debt ( mortgages).

The fact is that Kiwi's for the most part have very little net savings when compared to Aussies , and Asians such as those in Hong Kong , Singapore , Taiwan and Korea

by dh | 25th Feb 14, 11:44am 1393281859

Boatman wrote "A huge chunk of this asset number is in over-valued houses , and one wonders whether that is net of debt ( mortgages)". The short answer is that 700bln is not including the mortgages, but they tend to get counted in some measures of nett household debt, so the savings level of 120 billion I think reflects the debt (but haven't checked where ZZ is getting these figures from).

That said, no sane person should be using NZ housing values in calculations because the numbers defy reason. The value of New Zealand Housing stock went up $87 billion in the past 2 years (Reserve Bank Key Graphs data) but lending for mortgages only went up $1.6 billion (Reserve Bank C6 Household Credit), which is almost two orders of magnitude difference. In fact, in the past 2 years the entire combined yearly Real GDP of New Zealand was around about $72 billion (Reserve Bank M5 GDP).

Numbers that make so little sense should just be left out of calculations.

by scarfie | 25th Feb 14, 2:05pm 1393290355

If savings equals loans, why are you considering them as an asset?

by Ms de Meanour | 25th Feb 14, 1:46pm 1393289165

I've decided to make it a bit of a mission to challenge comments along the lines "economists are morons/economics is garbage because economists say, or do, [x]".

Please provide an example of an economist behaving in the way you describe as "typical of many".

by Ms de Meanour | 25th Feb 14, 2:54pm 1393293285

What exactly do you mean by "the above"? Your comment responded to a comment from dh. Is he an economist?

by Ms de Meanour | 25th Feb 14, 6:24pm 1393305873

No, you sound like somebody who has made an allegation which he is not able to substantiate.

Yes, economists use the term "bubble". Why should they not? Bubbles do exist.

How does that prove that economists typically disregard as nonsense everything that they do not understand? How does it prove that they dismiss variables that do not fit as "bubbles"?

by dh | 25th Feb 14, 4:29pm 1393298989

I am most definitely not an economist, and have never claimed to be so. But people like economists (such as the ratings agencies) have noted problems with the NZ housing market, so I think for ZZ to claim to $700 billion as figure of genuine, can count in the event of a crisis, wealth of NZers, he kind of needs to explain how it works since others (including me) have problems with it. I have no problem with the way the figures balance in other countries where the data is available, it is just the NZ figures that don't seem to make sense. But I have at least had statisticians who study the economy look over my maths and agree that I am not getting something basic wrong, they just aren't necessarily prepared to venture a professional opinion as to the reason NZ figures are so different to other countries. Now ZZ may be of the opinion that because I don't understand how the figures can make sense, I should just accept them as making sense, and that is his opinion. And while it is possible I lack the wit to add the numbers up, I have never met anyone else who can either. In this particular case I have an issue with the claim that $700 billion in assets is actually owned by NZers, as total productive economic output of the country (even if nothing at all was spent on anything else) could not have raised house value to that amount in the last few years. Now, I do think there are possible explanations for the discrepancy, ranging from foreign capital to the way housing stock is calculated in NZ being different to the rest of the world (things are a little opaque in that area) but either has the consequence that NZ people do not have $700 billion in housing assets.

by dh | 25th Feb 14, 2:45pm 1393292733

Strictly speaking what I am saying is that counting housing is a $700 billion asset that New Zealanders have is wrong because all the evidence contradicts that New Zealanders actually have a $700 billion asset.

It is not that the numbers are out by a little, it is that they do not match by sooo much, I am of the opinion you should not assume you can this is like other countries. While I've only got figures for NZ, Ireland, USA, and UK, at least the other countries housing markets make vague sense- In the UK last year house prices increased by about 186 billion pounds, but their real GDP is about 1500 billion.

by Simon | 25th Feb 14, 3:12pm 1393294367

Isn't it explained by the way property is valued? I.e mark to market.

E.g: Say I make 100 statues, maybe they cost me $10 each including labour etc, so I initially value them using historical cost at $10 each, $1000 for the lot.

I then sell 1 of them on the open market (at arms length, fair market etc etc) for $80.

I now re-value my existing stock in light of this newly found market value: 99 at $80 each = $7920.

Say the guy that brought my statue borrowed $75 to pay for it.

I balance my books and see my net worth has increased $6920 even though I've only sold 1 item for $80, and made only $70 profit. NZ assets have increased by $6920, household debt by only $79.

Thats how values can be disconnected from GDP etc.

The real worry is if I had to sell the remaining 99 statues (or even a decent portion, eg 10 statues) within the next week for what ever I could get for them.....

by dh | 25th Feb 14, 4:54pm 1393300471

Potentially, yes. But if that is the case then NZ property seems to being valued differently to other countries where household wealth/debt/ currancy printing actually explains the growth in house prices. There is a lack of clarity about how the value is calculated round these parts. If it is the case, then a drop in house prices among a few houses should produce a similarly dramatic decline in housing stock.

The real issue is that as if the market is actually moving to this new notional price, if the price is to be sustained, the actual money (or debt) has to come from somewhere at some point. So for the price to keep going up, debt should, at some point, be going up as well by an amount related to the value of the stock, even if there is a lag (in other countries there is actually a relationship here, but not NZ).

If it is the case that NZ is using a very different valuation model to other countries, then we should stop comparing our housing stock value to other countries, because there is no basis for comparison.

by dh | 26th Feb 14, 9:11am 1393359090

Heh. Plotting Dwellings and mean price rather than total stock values basically gives the same graph. Entertainly, when I've done that it it has been suggested that the reason for the diffeence between NZ and other countries was for the opposite reason, that we were not building like Ireland and similar places.

by Roelof | 25th Feb 14, 5:41pm 1393303317

dh.. is that a typo..?? ie C6 going up by 1.6 billion in 2 yrs. (should be $16 billion..?? )

It is not a lot different to trading shares.... ie. it is the last share price that determines the mkt Capitalization of a company. ( so a $1 million purchase of shares could result in a $10 million gain in mkt capitalization... the reverse also applies... if too many people wanted to "cash up" mkt capitaluization would collapse )

in 2013 I think Total sales of property in NZ was $35 billion (yr to mch 2013 ) and housing credit grew about $8 billion..

(The total sales voulme is a little misleading as many sales were probably followed by a repurchase.... I'll call that "transactional turnover ")

So.... $8 billion credit plus, say $11 billion equity .... then say, foriegn investors buy $6 billion and say... that leaves about $10 billion as "transactional turnover".. ( I'm guessing these numbers to make a point )

The point being.... I don't think the numbers defy reason.

I'm pretty sure NZs gdp is alot more than $70 billion..??

I think our nominal GDP is $200+ billion per yr.

by dh | 25th Feb 14, 11:14pm 1393323261

Thanks for the catch Roelof.

And yes, I agree that there are ways it all works, for instance if (to pull a number out of the air) 40% of recent sales were to foreign capital everything balances (making it clear that is not an exact estimate, I'm just pulling a number for discussion purposes). The thing is if something like that is the case then it is not a $700 billion asset owned by NZers that can be used in an emergency (in this case, because a fair whack of it has already been sold), so I will stand by my initial comments about that you shouldn't include it in calculations of how well off NZers are, because if you do the numbers don't make sense.

Yes the nominal GDP is higher, listed as about 53 billion on the Reserve bank page

http://www.rbnz.govt.nz/statistics/tables/m5/

and over two years is about 100

but I was really just trying to make the comparison between the size of the economy and the size of the increases between us and the UK (which is also talking about unaffordability), which I put in another post.

by Roelof | 26th Feb 14, 8:19am 1393355963

agree with u on that one....

Andrewj posted some good links to do with money laundering... The world is drowning in money looking for a home.

It is a paradox thaty all this dubious money wants to settle in places where there is a respect for property rights and the law..

So ..throw that on top of things.... and there is alot of buying power.

Auckland , as a global city, is playing catch up.... It will only become a political issue when prices go really crazy.

by Roelof | 26th Feb 14, 8:10am 1393355458

dh... u are quoting quarterly figures.... we have a $200 billion a yr GDP.

by dh | 26th Feb 14, 9:13am 1393359198

Man, I'm not having a good run on quickly looking up GDP gifures. Mea Culpa. I supose I should learn the lesson of not throwing extra bits in as a spur of the moment comparison. Still it does illustrate the rule that to get a good answer on the internet post a bad one.

by scarfie | 25th Feb 14, 10:45am 1393278300

The problem is that your $700 billion household assets is the house and little else. Or more correctly the land underneath the house. Since houses are really a liability you really need to subtract that value from the land value. The $700 billion doesn't have an economic basis for that value and is purely supported by the borrowing that Boatman outlines.

by Stephen L | 25th Feb 14, 10:02am 1393275749

Have amused myself by correlating the current account deficit to GDP effects of exchange rate movements, and found that there was an 89% correlation between 2000 and 2008, having lagged the effects on the current account by a year. Similarly from 2010 to 2013, there was a 95% correlation. 2009 after the GFC, was an outlier, in being consistent with the effect, but extreme in reducing the current account deficit.

Given that over time you would expect a current account deficit to reduce an exchange rate, you can only conclude that the exchange rate increase is causing the current account deficit. Or more particularly, the capital flows encouraged in, cause the exchange rate increase, which then causes the deficit. To put it in scale, the deficit is currently roughly $10 billion, or $200 million a week, or $30 million per day, that our government's passive approach to the exchange rate and capital flows is encouraging.

Given Key and English will presumably make another free gift of 30% of the float of Genesis offshore (because if you accept the causation between capital flows, exchange rates and current account, then a totally free gift it is), then just possibly their announcement yesterday has already had an effect on the exchange rate. The correlation suggests a 1% change in the exchange rate has an approximately 0.1% effect on the current account; or $200 million. Just possibly Key and English's expectations of foreign money in for Genesis.