Whilst short-term interest rates remain marooned at 2.70% with economic news/events/outlook not having any impact on their movements until much later in the year, long term swap yields have again bounced upwards from 4.00%.

There have been too many false starts over the past two years on US 10-year Treasury Bond yields increasing from below 2.00% to be comfortable now forecasting that this is the definitive move up that will drive NZ long tern swap rates higher. However, recent stronger US economic data does support higher long-term interest rates even if Ben Bernanke thinks otherwise by pledging to keep US short-term interest rates at zero for another two years. Global funds seeking a safe haven from the risk of Europe completely imploding always go back to US Treasury Bonds and the yield is forced below 2.00% again. Provided the Greek bail-out package is signed off by the Greeks this week, European risk measures should continue to decline and reduce the safe haven buying of US Treasury Bonds.

The NZ 10-year swap rates have been held artificially low by the sub-2.00% US Treasury Bond yields, once that is no longer the constraint the economic fundamentals for our long-term interest rates of 2% inflation, 3% GDP growth and continued NZ Government borrowing for deficits suggest swap rates nearer 5.00% than the 4.00% of late.

In my view, the evidence continues to accumulate that most economic forecasters and the RBNZ will underestimate the strength of NZ economic growth this year. Similar to 1993 and 2003 when growth proved to be much stronger than expected coming out of a downturn in the economy, the risk is that again monetary policy is maintained too loose for too long as the increased activity (thus inflation risks) is not recognised by the monetary authorities early enough. Latest lead indicators that provide me with the confidence to maintain the upbeat economic view include:-

§  The NZ dollar currency market and the NZ sharemarket have increased this year in expectation of stronger economic growth. Upcoming earnings reports will see positive profit increases for listed companies that shift goods around the country e.g. Freightways, Mainfreight and Port of Tauranga. What this tells you is that underlying trade volumes are up big time,

§  Even though last week’s historical employment data was not that positive, surveys and anecdotal evidence from the labour market suggests increased skill shortages and the demand/supply equation shifting in favour of the employee i.e. several job offers to choose from.

§  Agriculture production is up strongly due to both higher prices and favourable climatic conditions. Strong increases in agriculture GDP this year will dominate overall GDP growth statistics.

Net result of the above is GDP growth outcomes this year surprising on the upside.

NEW ZEALAND DOLLAR MARKET COMMENTARY

Aussie economic data more important for the Kiwi dollar than the Greek tragedy

Despite financial and investment markets around the globe being transfixed recently by the hour by hour and day by day developments in Europe as to whether Greece will default on its debt or not, the more likely determinants of NZD/USD exchange rate movements continue to be Australian and Chinese economic data. The Greeks had no alternative to take their tough austerity medicine, however any positives from their formal approval this morning were probably already priced into currency and equity markets. In other words, I doubt that the Euro and global sharemarkets will strengthen further on the “default avoided” news.  

Following the RBA’s decision last week to keep the markets guessing on their OCR changes, their quarterly statement on monetary policy on Friday was arguably not as upbeat on the economy as some may have been expecting. Overall, their policy prescription is still biased towards further interest rate cuts. Over this and next week there is a stack of Australian data being released to provide a clearer steer to FX markets. Expect to see Aussie business and consumer confidence lower and perhaps employment not bouncing back with a big positive following the negative jobs number last month.

Therefore the AUD correcting further downwards to $1.0600 against the USD appears more likely than another push above $1.0800. Add on weaker commodity prices and a stronger USD on global currency markets, both the NZD and AUD should be retreating this week.

The anticipated weaker AUD should have a more pronounced influence on near-term NZD/USD movements than firmer local retail and housing data that would otherwise be moderately positive for the NZ dollar value. Over and above Australian economic releases the next driver of the Kiwi dollar day to day movements will be Chinese economic outcomes. Anecdotal evidence still suggests that activity levels have slowed up in China, although official economic statistics do not show this (yet!).  

A reflection on the state of the global economy is that the outlook is improving when three central banks (Australia, European and Chinese) deciding last week not to ease monetary conditions further.  

In summary, the upward momentum for the Kiwi dollar from 0.7500 to 0.8400 highs appears to have run out of steam and selling by profit-takers appears more likely than further aggressive buying at 0.8300. In the short-term a pull back to 0.8000/0.8100 is very much on the cards, however for the Kiwi to be sold below 0.8000 it will take a bout of negative news out of China.