90 seconds at 9 am: NZ$ surges

90 seconds at 9 am: NZ$ jumps to 81.9 USc after US stocks rally on better than expected jobs growth; NZ$ back to late April levels when commodity prices were 20% higher

6th Aug 12, 8:53am by Bernard Hickey

Here's my summary of the key news over the weekend in 90 seconds at 9 am, including news the New Zealand dollar is trading up around 1 USc at 81.9 USc in morning trade.

It surged in line with a global rally in risk-sensitive assets such as gold, oil and US stocks after the world's largest economy generated 163,000 jobs in July, which was more than the 100,000 economists had forecast.

The S&P 500, the broadest measure of US stocks, rose 1.9% and oil prices rose 4.9%. Even gold rose 1.2%. See more here at Bloomberg.

The New Zealand dollar is now at levels seen in late April, back when the Reserve Bank warned it may have to cut official interest rates to compensate for the dampening impact of a strong currency on inflation and economic growth.

The Reserve Bank warned then the currency was over-valued. Since then both the currency fell and commodity prices fell 19%, but now the currency has rebounded by commodity prices have not. See our interactive commodities chart here.

Adding to the pressure on the currency, Morgan Stanley and Citigroup have combined to raise US$1.25 billion in NZ$ denominated bonds, the first such issues of bonds in 5 years. See more here from Gareth Vaughan on our site.

This means the currency is even more over valued in fundamental terms than it was when the Reserve Bank warned it was out of line. Commodity prices were around 20% higher back when the Trade Weighted Index was at the same level of about 73.5. See more here in BNZ's currencies report on our site here.

Meanwhile, the eurozone debt crisis continues to simmer. Greece is scheduled to run out of cash on August 20, but is now in talks with its donors to rejig its austerity plan.

Bloomberg reports here they have agreed to an extra 11.5 billion euros in budget cuts.

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19 Comments

by Andrewj | 6th Aug 12, 9:06am 1344200815

http://online.wsj.com/article/SB100008723963904433437045775531725069612…

by Bernard Hickey | 6th Aug 12, 9:37am 1344202628

Here's the full report on that report from Volcker and Ravitch on the US state budget crises: http://www.statebudgetcrisis.org/wpcms/

And a summary at HuffPo

State finances are teetering with $4 trillion in unfunded liabilities to cover pensions and health care for state workers, along with revenue shortfalls, antiquated financial practices and skyrocketing Medicaid costs.

To summarize, certain large expenditures are growing at rates that exceed reasonable expectations for revenues, including Medicaid, pension funds and health care benefits. And, at the same time, the capacity to raise revenues is increasingly impaired because of declines in sales, gas and income taxes. In addition, there are the spillover effects of the federal budget crisis on state and local governments, and state actions will have spillover impact on local governments.

http://www.huffingtonpost.com/richard-ravitch/state-budget-crisis-task-…

by Rudderless | 6th Aug 12, 2:29pm 1344220161

Thanks for the list bernard

All of these factors have since 1985 dragged down pay rates.

Lower average pay rates over the past 30 years are the reason for your concerns about housing affordability ratio.

Its the low pay that is the problem.

by Andy Rodgers | 6th Aug 12, 9:42am 1344202977

"after the world's largest economy generated 163,000 jobs in July, which was more than the 100,000 economists had forecast."

Bernard - Let's have some balance with the US Jobs numbers. The increase of 163,000 was from the Establishment survey. However In the Household survey, on which the unemployment rate of 8.3% is based, the decrease was 195,000. Additionally the Civilian labour force fell by 150,000 otherwise the unemployment rate would have risen more.

For a more balanced view of the latest US employment figures please see:

http://globaleconomicanalysis.blogspot.co.nz/2012/08/headline-jobs-163000-but-household.html

by south paw | 6th Aug 12, 10:14am 1344204842

Thanks for the link.

"Over the past several years people have dropped out of the labor force at an astounding, almost unbelievable rate, holding the unemployment rate artificially low...Were it not for people dropping out of the labor force, the unemployment rate would be well over 11%."

Is this, at least in part, because of the Baby Boomer generation beginning to retire now?

by Stephen Hulme | 6th Aug 12, 12:20pm 1344212414

No. They are moving to food stamps and disability benefits.

by Andy Rodgers | 6th Aug 12, 2:42pm 1344220934

In the U.S if you are 62 you can opt to receive Social Security, their terminology for the Gov't retirement benefit, at a lower rate than if you waited until the normal retirement benefit at 65. So many people are now choosing this option instead of trying to find a job in a very tight employment market. This is one of the reasons that the participation rate has dropped so dramatically. You don't see this reported in the MSM.

by Christov | 6th Aug 12, 11:24am 1344209053

There is something fundamentally wrong happening here.....a catch 22 has found Bollard unprepared, ill equipped, left only to resort to toothless warnings.

If I recall correctly the IMF warned again during the commoddity surge the NZD was overvalued......Cripes what is it now...?

Given the 84 fiasco , I wonder if you could seek out Sir Roderick Deane for comment on our current position.......good ol Rodders will help you I'm sure.

http://en.wikipedia.org/wiki/1984_New_Zealand_constitutional_crisis

here a little bit from you in March...2012

http://www.interest.co.nz/opinion/58332/bernard-hickey-warns-dangers-relying-strong-currency-keep-interest-rates-low-your-view

by iconoclast | 6th Aug 12, 12:27pm 1344212830

What?

(a) you're not expecting consistency are you, and

(b) internet's a bugger isn't it?, recording things for posterity, only to come back and bite one on the bum at a later date

by Stephen Hulme | 6th Aug 12, 12:27pm 1344212840

Sir Roderick Deane - is he the guy under whose stewardship Telecom was hollowed out? When I arrived back from the UK in late 1998 the share price was the thick end of ~$10.00 - thereafter it went to hell in a hand basket.

by steven | 6th Aug 12, 1:03pm 1344215027

That's because Telecom lost their price gouging ability. He over-saw the loss of the state granted monopoly, and technology over-took them shares were always going to dive. eg In 1998 Saturn was going to offer cable modems in select areas, Telecom guzumped them by doing adsl.....

I was on that 1997-8 adsl trial....all you could eat....so I was clocking 20~30gb a month.....for $99 (I was running a quake 2 server). A mate in a web business up in Thames had 2 x 64k DS lines off Telecom something like $1200 per line per month PLUS volume. The telescum sales ppl faught tooth and nail not to lose those margins to ADSL....failed of course eventually. Telecom had the check to offere me a retail service, same price for 600meg volume.......I said no thanks just a Saturn's cable tech finally turned up....so I swapped.

Look on the bright side NZ is better for Telescum's gradual demise....

regards

by Stephen Hulme | 6th Aug 12, 1:15pm 1344215722

Look on the bright side NZ is better for Telescum's gradual demise....

Not so for the shareholders.

Steven you very much confirm it was hollowed out, while Deane, Gattung and everyone thereafter loaded up on $million x 1-3 plus salaries.

And they still are a monopoly supplier of hardware in conjunction with the Government - No?

by steven | 6th Aug 12, 2:10pm 1344219033

The shareholders, well I recall them complaining at the annual meetings....but they could always sell and move.....the ppl left with no where to go were the fat cats....

What benefits the nation more? We were running a business that frankly the only one making money on it was Telecom.....so they charged what they wanted and we bore the risk for not much profit.....these days with such gouging gone the endevour would be profitable.....scale that up, hundreds of small businesses being more profitable v one lazy one with gouging capability.

regards

by Stephen Hulme | 6th Aug 12, 11:26am 1344209167

But won't a stronger NZD vs other currencies deter foreigners from buying the currency to speculate in our already overpriced Auckland housing market.

It won't be long before the firemen, nurses etc - all the people necessary for the smooth function of society won't be able to afford NZ.

Surely the RBNZ would want to extend the tool kit to take these factors into account. Even it's own staff at the new disaster recover location must be struggling to survive on their un-governor like salaries.

by Mark | 6th Aug 12, 12:15pm 1344212133

Nonsense, we can all buy houses. Borrow heaps and load up with houses and get rich.

by Stephen Hulme | 6th Aug 12, 12:58pm 1344214697

I guess you are right if our banks have unfettered rights to lend to those that can breathe, followed by the same freedom to securitise these assets and leave the retail depositors to swing under the authority conferred upon the RBNZ by OBR.

Kidding aside, I am firmly in your camp. Unfortunately you and your cohorts along with the depositors will be sacrificed so others can legitimately gain control of the assets.

You will be a beggar in your own lifetime, if you become too indebted to our banking institutions.

by Mark | 6th Aug 12, 2:47pm 1344221224

Tongue was firmly in cheek. I do have a house, but it is for living in, not getting rich (a novelty I know!). Would love to see some current NZ debt level stats, are we borrowing to fund this madness?

by wtf | 6th Aug 12, 1:45pm 1344217515

If NZD was a commodity currency it would move down and act as a shock absorber for falling commodity prices.

What it really has become, from the first big rort in the 1984 devaluation, is a speculative currency, with a very high correlation to risk on/risk off and global sharemarkets. Small and open equals pump and dump over and over and over. And after each major dumping where the NZD corrects down to US40-50c, the money comes flooding back to snap up assets at bargain prices, be it shares, property or state owned enterprises sold to pay the interest bill. Not just foreigners but our own re-branded patriots like Sir Michael Fay, Alan Gibbs and co.

NZ is so open and so vulnerable the sharemarket and currency could be decimated in a couple of days if "markets" were of a mind to, hence the armageddon threat used by the banks and other financial institutions to keep successive Labour and National governments on track and maintaining the status quo.

by gelous | 6th Aug 12, 3:04pm 1344222281

I have been fascinated by that same observation... initially I thought that our falling currency would offset falls in commodity prices, however that notion has proven to be very wrong indeed. One wonders just how vulnerable our little NZD is to external whims... I'm sure we'll find out soon enough!