Last Thursday’s RBNZ Monetary Policy Statement was arguable somewhere in between my “outrightly dovish” and “less than dovish” scenarios painted in last week’s report. It was a very neutral statement designed to placate and not surprise the financial markets. The statement had virtually no impact on the markets, so therefore succeeded in its objective. The careful wording indicating that the RBNZ learnt something from the October OCR review statement where they stated that interest rates would rise in 2012, which forced the Kiwi dollar up two cents.
As the year draws to a close with our market interest rates at record historical lows, it is timely to look forward to the likely “big themes” that will influence the RBNZ in managing monetary policy in 2012 and thus the timing of official interest rate increases.
§ New Zealand GDP growth: When we are tracking at +3.00% annual growth in mid 2012 it is hard to see the RBNZ leaving rates unchanged at current levels. Rural incomes are up, household de-leveraging has run its course and job security has improved to help consumer spending.
§ NZ residential property market: Do not place too much credence on the recent “Economist” article that sees our market 25% over-valued. It is always over-valued on price to income ratios. An examination of very recent trends of mortgage approvals, number of sales and house prices in the Auckland market suggests that the shortage of supply created by the very low house building rate over recent years is starting to force upward pressure on the market. When the RBNZ see the credit figures moving upwards next year do not be surprised to see Governor Bollard citing their old nemesis of inflation risks coming from the property market.
§ European economic recession: The recession will hurt Euroland Government finances, however further catastrophic financial shocks are unlikely in 2012 in my view. It is a long, hard work-out from too much debt in Europe; however it is not the end of the world.
§ Improved US economic performance: Whatever numbers you look at there is optimism that the US economy is on the mend and may surprise with its growth rate in 2012. Consumers and corporates are appearing much more positive, it just needs the politicians to sort their stuff out and all the indicators will be pointing north.
§ Chinese economy: No hard landing from the monetary tightening earlier this year. Increased domestic/infrastructure spending replacing weaker manufacture/export activity due to the European recession i.e. annual growth rates stays above +7.50%.
§ Commodity prices: Those savvy Chinese buyers always wait for the price to retreat from over-heated highs and they appear to be re-entering the market now i.e. no further material falls in hard or soft commodity prices in 2012. Wholemilk powder prices have found good strong support at USD3,500/MT, which is very positive for the NZ economy in 2012.
§ Oil market: Oil prices have diverged from general commodity price declines of late due to Iran tensions and non-OPEC countries not being able to supply the volumes required. Despite lower global growth forecasts, oil prices have increased.
§ Bank lending margins increasing: European investment/banking markets are disrupted and will take a while to re-settle. Bank credit costs are only going one way, as previously warned about.
The above synopsis is a long way from the financial/economic Armageddon the NZ interest rate markets are currently pricing for 2012. The sentiment and pricing may well turn a lot sooner than what most expect.
NEW ZEALAND DOLLAR MARKET COMMENTARY
Difficult to be negative on a NZ dollar outlook
The Kiwi dollar exchange rate is showing signs of settling in the mid-0.7000’s, as we expected it would. Contrary to the opinion of several local financial market commentators, I think forex market and general financial market volatility will reduce over December/January holiday period due to hedge fund speculators downsizing their bets after an exhausting year.
As the year draws to a close with the NZD/USD exchange rate likely to end the year at the same level it started in January (0.7700), it is timely to look forward to the likely “big themes” that will influence the offshore and local forces on the NZ dollar in 2012.
§ New Zealand GDP growth: When we are tracking at +3.00% annual growth in mid 2012 it is hard to see the RBNZ leaving rates unchanged at current levels. Rural incomes are up, household e-leveraging has run its course and job security has improved to help consumer spending.
§ NZ residential property market: Do not place too much credence on the recent “Economist” article that sees our market 25% over-valued. It is always over-valued on price to income ratios. An examination of very recent trends of mortgage approvals, number of sales and house prices in the Auckland market suggests that the shortage of supply created by the very low house building rate over recent years is starting to force upward pressure on the market. When the RBNZ see the credit figures moving upwards next year do not be surprised to see Governor Bollard citing their old nemesis of inflation risks coming from the property market. The change in interest rate market direction and sentiment will push the Kiwi dollar back up again.
§ European economic recession: The recession will hurt Euroland Government finances, however further catastrophic financial shocks are unlikely in 2012 in my view. It is a long, hard work-out from too much debt in Europe; however it is not the end of the world. However the Euro currency has to be quids on for further depreciation against the USD to below $1.3000.
§ Improved US economic performance: Whatever numbers you look at there is optimism that the US economy is on the mend and may surprise with its growth rate in 2012. Consumers and corporates are appearing much more positive, it just needs the politicians to sort their stuff out and all the indicators will be pointing north.
§ Chinese economy: No hard landing from the monetary tightening earlier this year. Increased domestic/infrastructure spending replacing weaker manufacture/export activity due to the European recession i.e. annual growth rates stays above +7.50%.
§ Commodity prices: Those savvy Chinese buyers always wait for the price to retreat from over-heated highs and they appear to be re-entering the market now i.e. no further material falls in hard or soft commodity prices in 2012. Wholemilk powder prices have found good strong support at USD3,500/MT, which is very positive for the NZ economy in 2012.
§ Oil market: Oil prices have diverged from general commodity price declines of late due to Iran tensions and non-OPEC countries not being able to supply the volumes required. Despite lower global growth forecasts, oil prices have increased.
Net, net result for the NZD/USD exchange rate is generally stable at or just below current levels in the first quarter of 2012, however a greater probability of rising above 0.8000 again after that.