RBNZ - Central Banks at the Mercy of the Markets
Graham Wheeler has been saying the Kiwi is over valued for as long as I can remember - as well as almost every other central bank in the world. There has been three things that has been plaguing Wheeler for some time; interest rate disparity, house prices and commodity status of the Kiwi. All of which to be fair, are largely beyond his control.
NZ's macro data has just not been 'that bad' enough to warrant simple lowering of rates to boost inflation and of course with house prices having gone amok, Graham's reluctance is well understood. However, with the recent rezoning in NZ's largest city just boosting roughly 45% of housing stock value in Auckland, it seems RBNZ is in another tough position. Fiscal and legislative policies are not coming from the government to address house prices and everything seems to have been left at RBNZ doorstep to manage. Having introduced macroprudent measures - RBNZ keeps finding themselves out paced with events and continue adjusting ratios to strike a balance to steady house prices. Too much could engineer an unwinding of housing prices to quick for mortgage holders to adjust and too little could lead to the bubble getting bigger.
To add to this - global economic outlook seems to be steadying and growth could begin pick in the near future, what would this mean for mortgage holders in NZ? Buying frenzy to get into the housing market during times of record low rates and record high prices - what happens when interest rates starting increasing in the near to mid term? Like much of the world - wage increases has been marginal at best and home owners could find themselves in unsustainable debt. Do note that there is no provision in NZ for mortgage holders to forfeit their properties back to the bank like in the US where by handing over the keys, one also hands over the burden of debt.
The high Kiwi has been attributed partly by higher interest rates than those of other leading economies and also by the central banks for the same countries having cold feet in raising rates. Paired with the recent commodity rally, in particular metals; the Kiwi has uncharacteristically strengthened along with metal futures; just like the Aussie. However, does anyone know how much NZ exports in metals....?
Unable to lower rates due to housing and wedged between the market and domestic interests, Mr. Wheeler has to make the following choice:
1) Risk an even higher Kiwi and not cut rates which will disappoint the market in large due as a cut is widely expected. Wheeler can cite housing market risks and macro prudent measures not fully in place; the going reason for the last 3 -4 months.
2) Appease the market and protect the reputation of RBNZ and cut by 0.25 as expected with minimal impact to the Kiwi as this has been / in the process of being priced in by the market since 0.735xx.
3) Cut by 0.50 ( only done once in aftermath of Christchurch earthquakes ) at the risk of inflating the housing bubble more thus increasing the risk and damage of a bubble burst but driving the Kiwi lower to support exports and risk volatility in the markets in the near future.
So long as the FED has cold feet in rasing rates - NZDUSD risks are to the upside and could see a retest of .735xx before October provided that metals futures continue the way they are currently. A correction of metals - which is due, might see NZDUSD going for .69 area since the RBNZ is penciled for 2 rate cuts this year. Unless both the FED raises rates and the RBNZ cut rates twice before December; we probably won't see 0.67 this year.
NZ's macro data has just not been 'that bad' enough to warrant simple lowering of rates to boost inflation and of course with house prices having gone amok, Graham's reluctance is well understood. However, with the recent rezoning in NZ's largest city just boosting roughly 45% of housing stock value in Auckland, it seems RBNZ is in another tough position. Fiscal and legislative policies are not coming from the government to address house prices and everything seems to have been left at RBNZ doorstep to manage. Having introduced macroprudent measures - RBNZ keeps finding themselves out paced with events and continue adjusting ratios to strike a balance to steady house prices. Too much could engineer an unwinding of housing prices to quick for mortgage holders to adjust and too little could lead to the bubble getting bigger.
To add to this - global economic outlook seems to be steadying and growth could begin pick in the near future, what would this mean for mortgage holders in NZ? Buying frenzy to get into the housing market during times of record low rates and record high prices - what happens when interest rates starting increasing in the near to mid term? Like much of the world - wage increases has been marginal at best and home owners could find themselves in unsustainable debt. Do note that there is no provision in NZ for mortgage holders to forfeit their properties back to the bank like in the US where by handing over the keys, one also hands over the burden of debt.
The high Kiwi has been attributed partly by higher interest rates than those of other leading economies and also by the central banks for the same countries having cold feet in raising rates. Paired with the recent commodity rally, in particular metals; the Kiwi has uncharacteristically strengthened along with metal futures; just like the Aussie. However, does anyone know how much NZ exports in metals....?
Unable to lower rates due to housing and wedged between the market and domestic interests, Mr. Wheeler has to make the following choice:
1) Risk an even higher Kiwi and not cut rates which will disappoint the market in large due as a cut is widely expected. Wheeler can cite housing market risks and macro prudent measures not fully in place; the going reason for the last 3 -4 months.
2) Appease the market and protect the reputation of RBNZ and cut by 0.25 as expected with minimal impact to the Kiwi as this has been / in the process of being priced in by the market since 0.735xx.
3) Cut by 0.50 ( only done once in aftermath of Christchurch earthquakes ) at the risk of inflating the housing bubble more thus increasing the risk and damage of a bubble burst but driving the Kiwi lower to support exports and risk volatility in the markets in the near future.
So long as the FED has cold feet in rasing rates - NZDUSD risks are to the upside and could see a retest of .735xx before October provided that metals futures continue the way they are currently. A correction of metals - which is due, might see NZDUSD going for .69 area since the RBNZ is penciled for 2 rate cuts this year. Unless both the FED raises rates and the RBNZ cut rates twice before December; we probably won't see 0.67 this year.
