RBNZ - Central Banks at the Mercy of the Markets

FX:NZDUSD   Neuseeländischer Dollar / US-Dollar
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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.

Nice outlook, so far so good. Price appears choppy especially after that widely expected 0.25% rate cut. Governor still retains his positive outlook and I really think the kiwi is at its peak. During his speech, he pointed that the issue of non tradable inflation which contributes 50% to inflation was partly caused by this foreign exchange disparity brought about by the exceedingly expensive kiwi and that even though it impacts negatively on the ideal inflation, there were absolutely no chances of intervention-he mentioned this during the presser. So what now, I think we shall remain bearish for now till after the Feds cut their fund rate this December. thereafter, Gold, Kiwi and Aussie should rally just like it did after December rate cut.
kiwiwalnut Kipyegonn
Thanks for the comment! Until there is unilateral global growth and upward inflationary pressures, we will continue to see limited impact central banks have on inflation and currency strength just by adjusting interest rates. Non tradeable inflation is largely beyond the scope of central banks and is firmly embedded in fiscal policy - Abe was on to something with his 3 arrows in Abenomics but he fall spectacularly short in structural reform and fiscal policy. NZ politics is too central leaning for any reform that will impact / shift underlying structure and direction of their economy and any efforts will be hamstrung due to conditions with their FTA's as NZ will continue to be reliant on primary industry exports. Unless there is wage inflation / increased wealth in NZ - it will be difficult to continue growth within domestic services. So in principle - I agree with your comment.

I do not agree with direction of the Kiwi - yes it is overvalued; yes there won;t be intervention as it is always short lived. US data looks disappointing and NZ employment data is skewed towards underemployment. I feel we will continue to see more upward movement after this retracement. NZD will ride the curtails of Chinese pick up in the coming months as I reckon there will be another rally in Chinese equities soon as companies reshuffle their books. If this happens - will see risk appetite increase which will lead to yield hunting - if Auckland City council times their first even bond release to fund future infrastructure projects ( will be rubber stamped by central government if even proposed ). will see more demand for NZD. However should not expect such a thing from the council anytime soon. I'm looking at shifting away from Gold and looking at Copper and Silver as indicators for AUD and NZD. Iron and steel is not currently as I feel the market is getting distorted with stockpiles and protective measures from US and EU currently
Revised outlook - PA most likely won;t break ~ 0.7153x level. What we are seeing is a build up of upward risk due to a tandem rally in both metals and commodities paired with still low sentiment of the Fed raising rates. There just hasn't been any indication from anyone that has convinced markets of increased probability in US outlook in the short to mid term.
Unless Wheeler comes out with a 50 point shocker - bottom TL will not be touched and likely to see 0.74 in near future
Sorry for the essay lol
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