Summary of key points: -
- Delta strain risks save the RBNZ from having to make a tricky monetary policy decision
- Upcoming US GDP growth and jobs data will keep the US dollar on its stronger path
- How much longer will the Kiwi dollar continue to rebound upwards from 0.6900?
Delta strain risks save the RBNZ from having to make a tricky monetary policy decision
Foreign exchange markets never bought into the strong view promulgated by the local bank economists over recent weeks that the RBNZ had to tighten monetary policy immediately and hike the OCR interest rate. In times gone by a sudden shift upwards in the forward pricing for New Zealand’s short-term interest rates would have sent the Kiwi dollar up one or two cents.
The panic reaction by the local interest rate markets to higher than expected inflation over the June quarter and the RBNZ not offering any kind of rebuttal to that interest rate market pricing in their last review statement, was not enough to convince the currency markets that the RBNZ would indeed tighten monetary policy at this time.
Therefore, no Kiwi dollar gains, despite all the hype and heroic statements from some quarters that New Zealand would be the first central bank in the world to raise interest rates after the Covid-related extraordinary monetary stimulus period.
Instead we witnessed a NZ dollar sell-off to an eight-month low of 0.6881 on 21 July as the US dollar continued on its appreciating path against the major currencies.
The weaker equity markets causing an investor “risk-off” mode also contributed to the NZD and AUD selling. Perversely, the growing reach of the Covid delta variant across the globe over this last week has seen equity markets spiral higher again as they expect the easy money policies to remain in place for longer. The NZD/USD has yet again rebounded back upwards to close at 0.6975 on Friday 23 July.
The rapid spread of the delta strain has suddenly overshadowed any expectations that the RBNZ will act to tighten monetary policy and increase the OCR at their upcoming meeting on 18 August.
There has been a sharp lesson in risk management for the protagonists for immediate interest rate hikes.
The reality is that we are still in the middle of a pandemic and both New Zealand and Australia have been complacent and slow to vaccinate.
Australia’s vulnerability has been exposed and community outbreaks of the delta variant could as easily occur in Auckland as they have in Sydney, Melbourne and Adelaide.
At this point, it would certainly be a stand-alone negative for the Kiwi dollar if the RBNZ did not increase the OCR on 18 August.
However, watch out for the interest rate markets to reduce their pricing expectations over the next three weeks and therefore by the time we get to 18 August it will not be such a surprise that the RBNZ leave the OCR unchanged.
Already, the suspension of the trans-Tasman travel bubble for two months has slowed up South Island tourist operators with Aussies prevented from snow skiing visits. There might be some relief within the RBNZ that the re-mergence of Covid related risks has saved them from having to make a tricky and perhaps unpopular decision to increase interest rates on August 18th.
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What will be interesting to observe from the upcoming RBNZ’s Monetary Policy Statement is their analysis on how temporary (or not) the current supply-side driven increases in the inflation rate will be. Previously they have highlighted the fact that they will “look through” such temporary price increases and not adjust monetary policy settings. However, New Zealand’s shipping and freight problems that have caused massive increases in costs for both importers and exporters is not about to resolve itself within a few short months.
The Reserve Bank of Australia remains adamant that it is not increasing their interest rates until they see wages rising. There is no evidence yet from our official statistics on labour costs that wages are rapidly rising across the board here. However, there is plenty of anecdotal evidence of local manufacturers and processors having to increase wages to between 5% and 10% to attract/retain workers. At some point the RBNZ will need to recognise the more permanent impact on the inflation rate from higher wages stemming from labour shortages due to the closed borders.
The inevitable conclusion from the above analysis is that the FX market environment we have seen over the last 12 months will continue. i.e. future NZD/USD exchange rate movements will continue to be dominated by the US dollar side with local NZ economic and monetary policy factors not really influencing at all.
Upcoming US GDP growth and jobs data will keep the US dollar on its stronger path
Global FX and financial/investment markets will be firmly focussed on two critical instalments of US economic data being released over the next two weeks: -
- GDP growth numbers for the June quarter are announced on Friday 30th July. Consensus forecasts are for an annualised 8.60% expansion over the quarter. An actual outcome above 9.00% would not be a surprise and if that eventuated it would propel the US dollar value towards $1.1700 against the Euro.
- Non-Farm Payrolls employment data on Friday 6th August should confirm another strong increase over 700,000 new jobs.
Stronger than forecast outcomes will be further evidence to the US Federal Reserve that they will need to take the next step towards signalling a progressive unwinding of their monetary stimulus. Fed Chairman, Jerome Powell may well hint at his next move in his presentation to the Jackson Hole central bankers annual jamboree (symposium) on 26-28 August.
How much longer will the Kiwi dollar continue to rebound upwards from 0.6900?
The trading pattern of the NZD/USD exchange rate over the last month moving between 0.6900 and 0.7050 is starting to resemble the 0.7150 to 0.7300 range that held firm in April and May. It is still anticipated that further USD strength to $1/1700/$1.1600 against the Euro will push the Kiwi dollar below 0.6900 over coming weeks/months.
*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.