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HiFX's Dan Bell says NZ$ could fall below US70c; RBNZ & Fed credibility on the line over interest rate expectations

HiFX's Dan Bell says NZ$ could fall below US70c; RBNZ & Fed credibility on the line over interest rate expectations

By Gareth Vaughan

A weakening New Zealand dollar could drop below US70 cents if the Reserve Bank of New Zealand cuts the Official Cash Rate (OCR), or strongly hints at cutting it, and weaker New Zealand economic data emerges, says HiFX's Dan Bell.

In our monthly never a dull moment currencies report Bell, director of sales at HiFX, said with the Kiwi at US71c on Tuesday, its lowest levels since 2010, the potential was there for it to slip under US70c. The RBNZ is due to review the OCR, currently at 3.5%, on June 11 with the market pricing in about a 56% chance of a cut, Bell said.

"It's not going to take much (to fall under US70c) if we get confirmation of a clear easing bias and we see some weaker data out of New Zealand, I think we could easily be into the high 60s. I think that would be justified," said Bell.

At that point it looks quite attractive for exporters, he added.

"I don't think many exporters would've been budgeting off a sub-70 Kiwi-US this year. I certainly know that importers weren't." 

"I think exporters have to do what's right for their business particularly if they've budgeted off certain levels and they can lock in gains. An exporter taking out a forward contract for one year at the moment, selling US buying Kiwi, would be getting under 70 cents, which is remarkable really considering 12 months or so ago we were trading at US88c. So it's amazing how quickly the currency can change, and obviously businesses need to be able to respond to that," said Bell.

RBNZ easing bias expected with 'credibility on the line'

Meanwhile, if the Reserve Bank doesn't cut the OCR on June 11 it's expected to have a definite easing bias, said Bell.

"They're already starting to talk about room to cut interest rates in New Zealand. (So) I think they'd lose a bit of credibility if they don't follow through with a clear easing bias next week."

"Obviously we've seen significant weakness in dairy prices over the last 12 months. The general feeling is that aggregate demand in the New Zealand economy is starting to come off the highs that we've had last year, the Christchurch rebuild has not quite run its course but it's starting to slow down, and perhaps the strength that we've seen in the housing market in Auckland, whilst it's still a big story, perhaps it isn't bubbling along at the rate of knots it was."

Fed credibility on the line too

The US Federal Reserve is also under the spotlight with expectations it too will move on interest rates, but in its case by lifting the Federal Funds Rate for the first time in nine years.

Last October the Fed brought the curtain down on its Quantitative Easing, bond buying, or money printing programme that was put in place at the height of the Global Financial Crisis in 2008. All up, this saw the Fed add US$3.7 trillion worth of assets to its balance sheet, which was about an eight-fold increase. However, the Federal Funds Rate, the US equivalent of New Zealand's OCR, remains at  0 to 0.25% where it has been since December 2008.

The Fed's Federal Open Market Committee (FOMC) next meets on June 16 and 17, and a June interest rate hike had been anticipated by the market earlier in the year. However, that has now changed.

"The market isn't expecting that (June hike) to happen. The market has now shifted the first rate hike from the Fed out to September this year," said Bell.

"I guess at the end of the day the market has stepped back a little bit and said 'well, the timing of the first Fed rate hike probably isn't as important as how aggressive they go moving forward.' So in terms of next year how many times they actually hike interest rates, which they are going to do I think that's a given. They've flagged it to the market, they've had the follow through in the economy for them to justify them hiking interest rates, and I think the time has come for sure."

How the global economy responds to a Fed rate increase is also important, Bell notes, given "everyone's pretty addicted to this cheap credit and the bottom line is the Fed set the tone for global credit demand."

"Obviously equity markets are still ramping along at record highs in a lot of countries, asset prices across the board in equities and the housing market and what not are still very, very strong. So  I think the Fed, to maintain any credibility, has to raise this year. But not in June," said Bell.

In the video Bell also talks about Australia and the outlook for the Australian economy, the Aussie dollar and Australian interest rates, and the conclusion many observers are drawing that "there is going to be some sort of (debt) default from Greece."

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Dan Bell is director of sales at HiFX, a UK-headquartered foreign exchange dealer with significant operations in Australia and New Zealand. It has a dealing room in Auckland. See more detail here.

 

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32 Comments

What has happened to all the bank economists that were calling for/predicting higher interest rates in NZ? According to their trend analysis NZ was supposed to be on an OCR of 4.75 by now.
The RBNZ is going to have to ignore Auckland and do what's needed for NZ.

it will be interesting to see how much inflation comes back into the system with the dollar dropping being a country reliant on imported goods and oil. I am seeing fuel surcharges getting back to the level they were same time last year

And so the cycle of increased imported prices rising (reducing spending power of consumer/homeowner) will be responded to by hiking interest rates (reducing consumer/homeowner spending) while wages remain flat (suppressing consumer disposable income).

Agree on the consumer spending but the problem is when they lower it doesn't go there but onto bigger mortgages for higher price housing. And until a government gets serious about changing the mindset of people to invest in housing then it won't change. There would be more consumer spending through tax cuts at the low end of tax rates as the low end spends all its disposable income. If they need to stimulate the economy maybe they should look at that

Which like raising the OCR will be a double whammy.

NZ is going to look back on this period and realise the full extent of the damage to our economy caused solely by our RBNZ.......It is a failure of enormous proportions to not have lowered the OCR at least 18 months ago.....I would liken the actions of the RBNZ to sending the All Blacks to a Rugby World cup and then expecting them to play with half the team wearing hobbles!!

Keeping the OCR so high against all major players for so long could well see NZ enter a recessionary phase.

For some reason we are always out of phase, last time first country into recession will we be the first again

I just don't understand why they have such incredibly bad timing issues Sharetrader.......if they were running the farm in a drought they'd be too late feeding the stock!

It is because (1) their models are incorrect, (2) the models are not fully integrated so are piecemeal, this is because they have lots of little piece they _want_ to work one way and make certain assumptions* based on false philosophies, and (3) they are educated and conditioned by the information they chose to holds that the status quo is correct rather than actually testing to see if their theories actually perform as expected.

* eg assumptions such as economics will improve under more taxation. or "trickle down".

What was mentioned a little while back about the Economic nutter Ronald Coase is classic example. the guy won awards saying that it is the _victims_ economic responsibility to fix the problem!
the example given in his work was a fence between a rancher and a crop farmer. Coase insists that its the farmers job to put up the fence - because the farmer has the most to lose. This translates to the existing problem that the government sees it's every day NZers who are supposed to be financial responsible for bootstrapping the economy (from and with nothing) because the local NZers have the most to lose (so must have the most incentive to fix the problem). Coase is clearly wrong, because if the farmer has the responsibility to build a whole fence to protect his loss, he will just shoot the wandering stock instead - thus saving himself much time and labour... and thus it immediately becomes clear that it is the rancher that stands to lose the most when the philosophy is applied to all parties and without prejudical assumptions..
In this case, the application of this is that it is the government that must immediately act to minimise _it's_ loses and do _it's_ job, not try to shift everything onto the citizens, and thus free up the citizens to have their own economic worth... because then once the citizens _have_ economic worth, they will happily build nice fences - at the moment they're down to hoping for wandering free lunches.

Not strictly true, our present do nothing Govn carries more blame right from the word go with its tax cuts. Not to mention (ok lets) HC/Cullen WFF pork and do nothing about the economy despite RB comments to help pls. Then consider the RB is reacting to how ppl invest, if we were "sensible" and not bedded in tulip mania then the OCR wouldnt have had to rise.

Really its like sending the RB to the rugby world cup only to find most of our side is on the other team!

The handle on the bucket you are standing in broke.....that's what happens when the weight is too great for business......but those standing on the left never quite got physics........

ditto the right dont understand that consumers can only pay so much, that is simple economics, nothing to do with physics/engineering.

Really you are being selective in who you blame for the problems you see when really for millennial man's solution to a problem is more complexity which needs more energy. Cheap and abundant energy, but now we roll over so for the first time in thousands of years we will have less energy moving forward for ever. What our future looks like is a "land grab" by corporations looking to get effective monopolies granted by Govns' over consumers, both ignore the consumers ability to pay. Now if you want to study that in action the fall of the roman empire and the role of the peasant farmer, Joseph Tainter, you tube.

You have a weird way of viewing the world Steven.

As long as people think they are gong to tax a country to wealth and push/vote for this then you are going to hurt the very backbone of NZ and that is the SME's....which includes most farmers.....

If you really wanted to keep NZ assets in NZ hands then you would not use the taxation system to penalise locals while allowing off-shore investors advantages.....don't give me the consumers can't afford it rubbish.....because if that is actually true then they actually cannot afford to demand tax redistribution in the first place.

I never said this dont put words in my mouth / straw men. "weird" Only because you have an extremist libertarian outlook does 99.99% of the rest of the ppl look strange.

a) I dont think tax is infinite, nor printing. I do believe the fixation on tax which is historically quite low compared to say the 1960s is a red herring however.

b) If you bothered to read what I write I do say the OCR is too high and is punishing SMEs. I do think the TPPA will punish SMEs.

c) I am all for banning foreign home and even business ownership and I have said so.

d) If you look at consumers and CPI which is an indication they cannot pay well you are blind frankly if you cannot see that. In terms of tax re-distribution your comment makes no logical sense, the middle class typically PAYE already pay the rump of taxation, what I do see is that there are significant sectors paying little or none. So not so much "re-distribution" but equal tax would be a start.

How the heck do you get that tax is low....why compare with the 1960's?

And who the heck do you think is going to be paying more taxation if it is not locals?

I am not the one protecting Nanny State you are!

My biggest bill each month is Government costs.....taxes, levies, licensing, fees, registrations etc......don't you go telling me that I should pay more to the Government than you.....or anyone else!!

part of problem is while consumers can only pay so much (in both prices and tax) the same goes for businesses/employers. while the consumer can't afford the goods and services because the wages are too low; the wages themselves are only one expense the business has and one of the few it has control over. Capital is very expensive to get in NZ, so high capital costs (ie high tax), high expenses, high compliance...leaves little left over for wages.

high taxation works ok when businesses have capital reserves, or citizens have purchasing power & capital themselves. but if those conditions don't exist it strangles the process.

If those conditions do exist - remembering that in easy compliance times cheap shortcuts, personal labour, re-use of available materials all count as available capital. In tight compliance times, such capital methods are often too expensive to be used. It looks good from a government "top-down" because of the increased quality employment, and extra quality controls, and taxable incomes, but in reality it's the "anti-GDP" effect - because that salary is really just disposable income taken and relocated from the other citizens.

In the farming circumstances one has to be very careful not to do this. By introducing extra feed types, there is a "substitution effect", the extra feed _should_ improve output, but in reality all it does is allow the higher ranking members of the herd to be more picky. so the costs increase but output will stay the same, or even drop! (as the lower ranking members do not get the benefit of the higher yielding lusher inputs - as the others push them out of the way).
A poor farmer will either increase the inputs, thus increasing the problem. Or put on more animals (workers, wage pushing) which just increases competition at the bottom levels resulting in increasing loss.

You are looking for a stoichiometric balance, and such a balance is never stable at unity. Also some factors have higher Q than others (ie they are more sensitive/responsive - if farming one such factor is the animal handling skill of your staff. small changes = big differences, but on the surface it is not an obvious transaction cost as it is not linked directly to inputs or outputs - but a good manager needs to know the roles of such elements under their management.

Our captain is certainly on the other team and if you extend the analogy to our cricket team he thinks we are playing 20/20 instead of the longer test game. Short term results are OK but will our children remember him fondly as they work 50 years to pay off a mortgage.

Nope.

11
up

I'll suggest that all of New Zealand will look back and see what damage WE did to our economy by allowing property prices to escalate as they have. Imagine how much spare income/debt capacity the country would have if property prices had remained static at 2005 levels; about half what they are today. All that equity that has been ploughed into housing and all the attendant servicing costs used to other and better effect in our economy. I don't blame the RBNZ for what's happening. They tried, back in 2006 by pushing the OCR up to 8.25% to try to avoid what we see today. But the GFC and the Earthquake got in the way of their far-sighted plans. That's a shame. And if the RBNZ does get back on track, then taming the property market is the only way of going forward. Will some suffer? Absolutely! But many, many more will be given back a future in our country.

I agree.

We've had a strong NZD for a while. Have the businesses taken the opportunity to invest? to buy cheaper machinery?

Nope, money has gone to real estate and unproductive goods because the government has made it a more profitable investment (lack of taxes, bad regulations).

Now we seem to forget that NZ needs to import goods and we want to make debt easier in an already indebted economy just because everyone else does it.

If only we were USA with its dollar and the most innovative and powerful industry, or UK with the City, or Europe with its strong technology sector,..

But no, we want to sell more milk..

Want to lower OCR?, ok, but shouldn't we burst the property bubble first!? There are good debts and bad debts. We're flooded with bad debts (in unproductive assets that will decrease its value leaving nothing more than future value redirected to pay bad debt) and we want to simply make easier further bad debts? Scary.. We don't seem to be targeting the real problems here..

Not businesses, they have been struggling and that sector is in deflation, so you odnt invest to lose money. The ppl who have money are not investing in businesses they are investing aiming to make zero tax gains.

Absolutely. The only way out of the mess seems to me to let the RBNZ set interest rates just high enough to put gentle pressure on house prices and for Bill English to loosen the purse strings a bit to compensate. If the government run a realistic deficit (say 3% of GDP) whilst we rebalance to an economy based on saving and productive investment this would give the RBNZ room to be a little tight. As it is we have the horse before the cart with the RBNZ being forced to loosen so Bill can be a bit too tight; thus encouraging an economy based on house price speculation and borrowing. Bill can tighten in a couple of years time.

http://www.telegraph.co.uk/finance/economics/11644471/Britain-can-afford...

There could and possibly should be 2 OCR's

One based on HPI for property mortgages and one based on CPI for business and consumer lending

Now that the RB has turned to region specific solutions, there is no reason it can't become creative and differentiate between different types of lending

by "property mortgages" do you mean "homeowner-occupier mortgages"? Many small businesses are started because the founder can get a loan on their house and they need that working capital to get proof-of-concept and prototypes for stage 1 chasing of funds.

There is already "supposed" to be a _discount_ in place for homes. But like the IRD, in the past, there was more funds and things were cheaper for us and the government, so strict control on the policy wasn't required. the discount was supposed to be for moving families and FHB but it's been used for all residential purposes due to the wording (perhaps for the earlier mentioned business startup reason).

We do have to be careful though.
I expect a 5.5-7% net yield on residental property. That's quite light and doesn't give much room for compliance changes (such as the LBP and scaffolding expenses) and almost nothing for development (eg insulation initiatives). In fact it barely covers extra repair and tidy ups.
At the current rate my children might have some advantage from those investments.

What would it take (in portfolio price) in your area to provide the median wage for your area?
For my area, which is quite favourable yield (6%) and quite low median wage (35k) I guestimate it would require a portfolio of around 1.75 Million dollars just to get that median wage on property alone (no cap gain/spec). I think that's actually quite an important ratio/factor to consider.

Like the farming, those who have been "in the game" for generations and receive the assets without burden, it is quite profitable sacrifice and decisions their elders have made.
But for people on 35k median wage, getting that 1.75M paid off, even with rents giving 6%, is quite a challenge - one that perhaps doesn't need punishment on the borrowing required.

NOE

can you provide some context to your comment?

Are you talking about interest rates on business loans and overdrafts?

Or, are you talking about residential mortgage rates?

What are the current bank interest rates on business loans? secured? unsecured?

Agriculture in particular needs a break!!!

If we want NZ agriculture to compete successfully on the world market then they should have the same low OCR base of their competitor countries.

RBNZ has always screwed farmers....and this needs to stop!!
.I would go as far as insisting interest rate parity with residential housing mortgages.

Just need fonterra and other suppliers to stop undercutting their markets. then farmers could actually pay the standard rates

Spoke to a banker recently NOE who admitted that farming interest rates are less in the North Island than they are in the South. Kinda explains why there are so many North Island domiciled farmers with multiple farms in the South. The banker did go on to say that eventually the lower rates trickled down South. But i would wager that by time they reach the South, the rates have already changed in the North.

I don't understand these calls to cut OCR..

Is it because dairy prices have fallen? Well, maybe farmers need to decrease their profit margin OR land prices must go down.

Is it because inflation is low? If only house prices and accommodation were cheaper, maybe demand would be higher and we could see a greater inflation.

Is it because businesses don't invest enough in productive economy? Maybe if we had CGT on speculation and we taxed further financial risky games we could redirect more investment where it's needed, in productive economy, creating jobs, increasing salaries through productivity..

It's a mistake trying to be competitive internationally through a lower currency and QE. What if everybody does the same?

I think the current situation should encourage NZ to change its production model, to rely less on commodities, on exports to China, and to start producting things with higher added value, being competitive in the technology sector where a lower/higher currency does not make such a big difference in the economy and we could have stronger currency and still export quality.

I'd like to see OCR higher, less growth base don debt and more growth based on productivity.
And dairy sector will not be productive while debt and speculation on house/land prices is encouraged.

Whether you like it or not NZ is good at the food production side.....and this is a good thing....most people eat 3 times a day so have to keep buying food......I'd say that food production is a damn good industry to be in while the worlds population is still growing.

yet I wonder if the amount spent on food is static or even declining. Certainly a line by the CEO of asda/tesco/sainsburys ( I forget which one) along the lines of ppl had slowed on food spending and he'd never seen such a thing in some decades in the business made me take heed.

Interesting thing we make food for 20million but have only 4million ppl. However that output is fossil fuel based, remove that and we have a 60% downsize. So can feed maybe 8million. OK until you consider that NZers earn less than foreigners and things like the TPPA will mean that NZers can be out bought for food and our Govn wont be able to do a damn thing about it, or get sued. All our quality fish already goes overseas to Japan, whats left is over-priced rubbish. In short even if the world's population is declining which it will food will still be important.

Perhaps it will require a major calamity such as the Chch earthquake to move the RBNZs hand to cut.

The level of OCR has very little effect on the Auckland housing market. 8.25. Or 2.5% there are other major drivers outside interest rates.