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NZ$ slides to 75 USc and wholesale interest rates fall after quake devastation; Markets now see no OCR hike until 2011 and possible emergency rate cut

NZ$ slides to 75 USc and wholesale interest rates fall after quake devastation; Markets now see no OCR hike until 2011 and possible emergency rate cut

 
By Mike Jones*
The large earthquake that struck Christchurch yesterday is a national disaster that will remain in the hearts and minds of New Zealanders for decades. The impact of the September 4 quake pales in significance to yesterday’s shock, where the full human and economic cost will not be known for some time. Our thoughts and prayers are with the people of Christchurch and their friends and family.
 
Economic and market impacts seem inconsequential at a time like this. But, for those that are interested, a brief commentary follows.
 
The immediate market impact of the quake saw the NZD/USD fall ¾ cent to around 0.7560 and local swap rates slide 5-20bps as investors priced out any chance of an RBNZ rate rise over the next 12 months. Moreover, current market pricing appears to be consistent with some chance of an emergency RBNZ rate cut. Our OIS model suggests investors ascribe roughly a 50% chance of an RBNZ rate cut by June.
 
Yesterday afternoon and overnight, the NZD extended its losses as the news from Christchurch continued to worsen. Heavy NZD/USD and NZD cross selling from a mix of momentum and short-term speculative accounts saw a further ¾ cent knocked off the NZD/USD and widespread weakness amongst the NZD cross rates. The NZD/AUD finished the night around 0.7500, from above 0.7570 before the quake. NZD/EUR and NZD/GBP both shed over ½ cent.         
 
For the record, we have shifted our OCR rate view and NZD forecasts in the wake of yesterday’s tragedy. We now expect the RBNZ to keep the OCR unchanged for the rest of 2011, as economic activity is again significantly disrupted and any repair and rebuild is significantly delayed. Formally, we have moved our forecast for the next OCR hike to January 2012, from September 2011. We will continually reassess our view as more information comes to hand.
 
At this stage, we do not believe the RBNZ will cut the OCR on this news – largely because lowering interest rates will do very little, if anything, to help.
 
Still, we think the RBNZ will need to lift rates further down the track as other drivers boost activity such as strong commodity prices (including the large lift in Fonterra’s payout announced yesterday that will inject an additional $900m into the economy compared to its previous forecast), the Rugby World Cup, recovery from previous droughts, lagged effect of personal tax cuts and 1 April corporate tax cuts. All this while inflation expectations are elevated enough to be a headache for the RBNZ.  
 
Consistent with our lower interest rate profile, we will also be lowering our NZD forecasts in due course. We will look to finalise these at some point today but expect to see our previous expectation that the NZD/USD will climb to 0.8000 by mid-year dropped, and our year-end forecast to be closer to 0.7000 than the current 0.7600.
 
For today, developments and updates from Christchurch will continue to influence the NZD and interest rate markets. There is no local data due to be released. Initial support for NZD/USD will be found at the overnight low of 0.7440, while near-term resistance will be encountered on any bounces towards 0.7550.

Majors

By Kymberley Martin

Risk aversion came to the fore again, overnight. The CHF was the most notable beneficiary of rising “safe haven” demand, while the USD index ended the night largely flat, after a fair amount of volatility.
As political unrest in Libya escalated, and with the risk of increased instability in the region, the VIX index (a proxy for risk aversion) spiked higher. It reached 20%, a level last seen during the recent unrest in Egypt. The price of oil hovers close to a 2½ year highs just below US$92/barrel.
 
Equity markets came under significant pressure overnight. The EuroStoxx 50 plunged around 1% and the S&P500 is currently down almost 2%. US 10-year bond yields fell to 3.47%, giving back a large proportion of their early February gains, as investors looked toward “safe-haven” assets.
 
Early this morning, the USD received a mild lift from the release of the ABC consumer confidence index that showed confidence in February rose to 70.4 (65.5 expected) from 60.6 previously. Elsewhere, the CHF and the JPY were the best performing currencies overnight, benefiting from the rise in risk aversion. In contrast, a heavy toll was taken on growth or risk sensitive currencies like NZD, AUD and CAD.

Mike Jones and Kymberley Martin are part of the BNZ research team. 

 

All its research is available here.

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8 Comments

Whatever Bollard does with the ocr...it will not stop the commodity inflation arriving with all imports and should he opt to play games with cheap credit for longer, you will see the rate v the us fall into the 60s....and that will mean petrol and diesel rising by a massive amount and food following because most food is transported by truck.

Cheap credit will not solve this economic problem. Reducing the cost of the state will. It would be far better if English and Key could drag themselves away from trying on Helen's socialist skirts and actually make a start on chopping away at the size of the state.

Telling the public the whole truth would be a good way to start. Stop the spin. End the BS. The tradeables sector 'superman' is a myth. An economy of 4 million having one million on benefits is utter madness.

 

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Right Wolly, a rate cut will spike import prices with big inflationary pressure directly on the people, as bad as a bad aftershock. Nobody will benefit.

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Yes Wolly , that's what we need. Slash Civil Defence and teachers, and doctors, and Army and WINZ - obviously.

The end - we don't need government at all. How far this individualistic thinking will go.

The family and that's it. Weapons everywhere so you can defend yourself. You will survive. If rest cannot - that's another problem.

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Ok stp....by your argument we need to increase the size and cost of govt! ....doh

I did not call for an axing of those who are needed in emergencies did I?.....I am calling for an end to the bloating of state departments that are not needed and for an end to the massive state salaries dished out to 'senior' state employees.

You need to tell us why one million have to be on a benefit in a country of 4 million...tell us why this is so stp!

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Well OCR cuts wont help Canterbury

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Firstly, this is a tragic event, and thoughts are first and foremost with the people,  but of course minds now turn to the wider impacts.

I'm afraid this is going to well and truly root the NZ economy

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Totally agree with you Wolly. NZ has reached the tipping point. Firstly, we need to deal with the immediate emergency of CHC. Then the Govt needs to give NZ a reality check and tell the truth.

The tradeable sector will not be sufficient to crrate the necessary jobs and NZ can not afford to retain its welfare system and possible not its education and health system.

Options include:

a. Opting to be a state Australia. NZ will still need to solve its problems but this allows us more time to make a less painful transition. It is also easier politically for Australians to make the hard decisions for us.

b.  Make some very, very hard decisions. People need to start taking responsibility for their own lives and for their families.  

But what we need mostly is honesty and personal responbility.

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Here here

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