Friday's 90 seconds at 9am with BNZ: NZ$ jumps after OCR hike and Dow surge; Aussie jobs strong

Friday's 90 seconds at 9am with BNZ: NZ$ jumps after OCR hike and Dow surge; Aussie jobs strong

Bernard Hickey details the key news overnight in 90 seconds at 9am in association with the BNZ, including news the New Zealand dollar is up a full 2 US cents to 68.6 USc in morning trade. See our interactive chart below

This follows a slightly more hawkish than expected commentary from the Reserve Bank after its widely expected 25 basis point hike in the Official Cash Rate. The Reserve Bank is now expected to slowly increase the OCR to around 5.75% over the next two to three years,  which would lift floating mortgage rates towards 9%.

But the New Zealand dollar was also up strongly because of a strong performance on US stock markets overnight. The New Zealand dollar tends to strengthen when global equity markets are bullish because the Kiwi dollar is seen as one of the world's riskier commodity-based currencies that does well when investors are looking for a riskier bet.

The Dow was up more than 2.6% in late trade on positive signs for growth from Asia and more soothing sounds from Europe's central banks. Chinese exports rose a startling 48.5% in May, which was better than the 32% growth forecast.

Also, Australian jobs growth of 26,900 in May was better than expected and the unemployment rate over the Tasman fell to 5.2% from 5.4%.

In Europe, the European Central Bank left its official cash rate on hold at 1% and pledged to keep buying bonds to support wobbly financial markets over there, while the Bank of England also held its official rate at 0.5% and kept its plan to buy 200 billion pounds worth of bonds in place.

So what?

The New Zealand dollar move isn't too surprising and it remains within the ranges it's been trading in recent months. It is as much to do with the global stock market rebound than anything else. It's obviously bad news for exporters, but helps further contain any inflationary pressures. 

The strong Australian and Chinese economic figures are great news for New Zealand on the face of it, given New Zealand is now a suburb of Australia, which is a province of China. 

There is a drawback though in the strong Australian jobs growth figures. There has been an ominous turnaround in migration statistics in recent months as New Zealanders start heading across the Tasman again. That would be bad for demand in the housing market and ultimately accelerate the hollowing out of our workforce, unless of course we reform our economy to lift wages and improve housing affordability.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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Les,

In short, no. The Core Funding Ratio is a big help, but at some stage rates have to rise.

Eventually the cost of capital has to rise to help the economy adjust without an inflationary surge.

Savers need higher rates. Borrowers need higher rates. When we don't save enough and we borrow too much, as New Zealand still does, the only way to square the circle is to hike the rate.

cheers
Bernard

My mum has no illusions. I have no impact. But it is fun to talk about this stuff and we're happy to be a forum for a wider debate, which may have an impact.

cheers
Bernard

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