“Take-outs” and “learnings” from the RBNZ’s monetary policy statement last week may be summarised as follows:-
§ Governor Bollard himself heavily influenced the first part of the statement which was correctly downbeat due to the uncertainties from the recent global market turmoil. The RBNZ do not know right now how Europe will pan out and what it means for the global economy, therefore there are endless permutations as to what are the likely monetary conditions in six and 12 months time.
§ The RBNZ economists had to admit in the second half of the document that the domestic economy had been stronger than they anticipated over the last 12 months. However, similar to most bank economist view’s at this time they see retail, housing and employment continuing to grow based on incomes increasing, in almost blind ignorance at what is happening globally. A number of banks had prior predictions of an “upbeat” MPS statement, they must operate on a different planet to the rest of us!
§ The RBNZ do recognise the “dampening influence” the high NZ dollar value is having on the export sector and thus the economy. My view is that they continue to underestimate the dominating power of the NZD/USD exchange rate over economic growth in New Zealand. The sustained period above 0.8000 has severely damaged export industry confidence, profits, output and investment. Up until three months ago the rising commodity prices off-set the currency negative, however commodity prices are now falling.
§ The RBNZ remain confident that agricultural commodity prices will remain at their high levels. It would be nice to share that confidence (which appears to be courageously based on what Fonterra tell the RBNZ!), however current global trends suggest otherwise. Weaker global economic growth than earlier assumed must exert continued downward pressure on all commodity prices. In turn, the speculators in commodity markets will be forced to reverse their long positions.
§ The RBNZ have reduced their 2012 GDP growth forecast from +4.00% to +3.00%, however that still looks too high based on a 0.8000 NZD/USD exchange rate continuing. If the Kiwi falls into the mid 0.7000’s they may be right.
§ As expected, there was little change to moneymarket forward pricing and yield curve shape as a result of the statement. The RBNZ have lowered their forward TWI and 90-day interest rate assumptions, however it never pays to read too much into these projections (they are not official forecasts).
§ Also as expected, sharply higher bank borrowing margins in offshore markets will automatically increase borrowing costs without market base interest rates moving. The banks are not currently borrowing in offshore markets and their lending is not growing, however eventually they will have to refinance (roll-over) maturing offshore debt at higher margins. The high currency value and increased bank margins leave monetary policy settings today arguably tighter than what a revised down growth outlook justifies. For these reasons Governor Bollard is on indefinite “hold” with monetary policy.
It is impossible to argue against the RBNZ’s revised monetary policy stance. Until the world works out where it is going, our interest rates are going nowhere.
NEW ZEALAND DOLLAR MARKET COMMENTARY
Local and international trends continue to buffer the Kiwi dollar
The conditions were not quite right last week to push the Kiwi dollar below the key 0.8000 level; however with Europe and the Euro deteriorating further, Kiwi dollar selling took the rate to lows of 0.8120. The decision late last week by the various central banks to assist European banks with short-term funding and liquidity problems provided a temporary reprieve for the EUR exchange rate from further selling. Of course, the emergency USD funding for the banks does not solve any debt problem in Europe, and just delays the inevitable of a Greek default and European banks writing-off the value of the Greek bonds on their balance sheets. The recovery of the EUR/USD rate from $1.3500 to $1.3800 allowed the NZD/USD rate to bounce off 0.8120 and push above 0.8200 again.
The European problems are far from being resolved with the Social Democrat Party in Germany (Chancellor Angela Merkel’s party) losing considerable ground in regional elections in Berlin over the weekend. The real risk of a Greek default remains and market pressures can be expected to be re-exerted this week in the currency markets, sovereign bond markets and on the share prices of European banks in the equity markets. All this adds to a greater probability of a decreasing EUR/USD rate to below $1.3500 and the Kiwi pressing 0.8100 again.
The focus of currency markets this week will be on the Federal Reserve FOMC two-day meeting in the US to thrash out whether a QE3 printing of more USD’s is necessary and what it will achieve. We will have news through from that meeting on Thursday morning NZT. The debate is whether Chair Ben Bernanke can get majority support from the voting Fed Governors to provide more stimuli for the US economy to lift economic growth and produce jobs. Printing more USD’s for the banks to hold on their balance sheets will not be effective (many of the lending channels remain clogged-up in the US). The housing market in the US needs much more than record low mortgage rates to recover. However, that policy initiative has to come from the Obama Government and I expect Ben Bernanke to state this rather explicitly. The markets seem to be anticipating a form of QE3 (maybe delayed in implementation), however the mood does not appear to be to sell the US dollar big-time on such an announcement.
Locally, we have Balance of Payments Current Account and GDP data for the June quarter on Wednesday and Thursday respectively. GDP growth will be down on the strong 0.8% expansion in the March quarter. Weaker than expected wholesale trade and still poor construction industry activity levels will pull down buoyant agriculture production/prices in the overall scheme of things. The markets are forecasting +0.7% for the quarter, however that feels too high on top of the strong gains in March. A weaker than expected +0.4% result may well cause NZD selling. Fonterra release their financial results on Thursday, which will include the actual NZD/USD conversion rate achieved over the past 12 months. Fonterra have maintained their $7 milksolids payout forecast despite a rising Kiwi and falling wholemilk powder prices. In addition to currency hedging, it appears that they have astutely sold forward milkpowder at the record high prices available earlier in the year.
All of the above will be influential on the NZD/USD exchange rate movements at the margin; the real game breaker for the Kiwi is what the AUD/USD rate does. I am picking that the mood and sentiment in global FX markets has turned against the Australian dollar, in much the same way that their rugby team displayed they are just a one-trick pony on Saturday night.
The vulnerability of the Australian economy and dollar to a downturn in metal/mining commodity prices is acute in my view. The CRB Index continues to trend down and indications within China are that the tighter monetary policy has slowed the internal infrastructure spending. Recued global growth forecasts remain negative for hard commodity prices and the AUD. The AUD/USD rate is now trading below its 200-day moving average and I expect global FX players to be more inclined to sell the Aussie than buy it from here. RBA minutes to be released this week may provide some ammunition to that market sentiment.