Summary of key points: –
- Kiwi backs down despite hawkish RBNZ
- Government complacency and inaction has failed New Zealand’s public and economy
Kiwi backs down despite hawkish RBNZ
It has been a volatile and highly uncertain time for the New Zealand dollar foreign exchange market, as well as for life in New Zealand in general over the past week.
The Kiwi’s immediate depreciation in mid-afternoon last Tuesday as the Covid delta strain outbreak was announced reflected the “we’re leaving with another lockdown” from most people.
Selling the NZD against the USD over 0.7000 to 0.6800 also represented an immediate reduction in interest rate hikes by the money markets, with the RBNZ’s monetary policy statement due to be released the next day.
The RBNZ has chosen a cautious and sensible response to the rapidly changing environment by essentially postponing planned increases in OCR to another day.
However, Governor Adrian Orr’s subsequent media statements made it clear that they are immediately on the path to unwinding last year’s monetary stimulus because the economy no longer needs it.
The RBNZ statement was openly hawkish and would have pushed the Kiwi dollar up a dime or two more if the Covid outbreak had not occurred.
The RBNZ’s new stance is a radical departure from its stated stance of “looser longer” just a few months ago.
They appear to be somewhat immune to short-term increases in employment and inflation during the June quarter. As this column previously indicated, favorable conditions in the housing and retail sectors (to which the RBNZ is responding) are not only fueled by debt, but do not reflect the broader productive side of the economy. New Zealand where trading conditions are a bit more difficult.
On the inflation front, the ongoing debate over whether recent increases are temporary or permanent has not been settled anyway.
Oil and commodity price increases earlier this year are now reversing rapidly, supporting the temporary case.
The RBNZ did not recognize this more recent development in its monetary statement. However, continued and rising costs and disruptions in the shipping / freight / supply chain indicate more permanent price increases across the economy.
The RBNZ’s stated goal of being the first central bank in the world to raise interest rates (again to 2.00%) is certainly positive for the Kiwi dollar alone in the medium term. However, in the near term, the continued strength of the US dollar in global currency markets (as we predicted for this time frame), coupled with the Covid community epidemic and economic lockdown, pushes the Kiwi lower. .
What was surprising about the RBNZ’s monetary policy decisions is that it continues its “FLP” funding program where it provides cheap / direct debt to banks for on-lending to the economy.
All that money was spent on home mortgages (not on businesses or agriculture where debt levels have declined) and fueled the residential real estate bubble.
Australian-owned banks are in a strong enough position to fund their own books from retail and wholesale deposits. If banks have to pay higher interest rates to attract their own funding, so be it.
We previously operated in a two tier interest rate environment, with retail bank deposit interest rates significantly higher than wholesale / OCR interest rates. Abolishing the FLP is a way for the RBNZ to tighten credit conditions in the economy without pushing the OCR and the New Zealand dollar too high and hurting the revenue-generating export sector.
Our consistent view since February that the NZD / USD rate would fall below 0.7000 to 0.6800 has come true.
The direction of the NZD from here over the next few months will depend on the following two factors, which together favor a short-term lateral reshuffle and then a return above 0.7000 in the medium to long term: –
- Global currency markets will see all the positive elements of the US dollar (gradual reduction in quantitative easing by the Fed and increase in interest rates at the end of 2022) fully integrated into the EUR / USD rate over the next two months. . The stronger US dollar trend is running out of steam in the $ 1.1600 / $ 1.1500 area against the euro and reverses to the weak US dollar at the end of 2021 and into 2022 due to the negative double deficit position of the United States.
- The RBNZ potentially unwinds the 2020 monetary stimulus too quickly with increases in OCR over the next few months that attract offshore carry-trade punters and push the Kiwi dollar up on its own (see chart of NZ swap interest rate differential: US 2 years below).
There is no real excuse for USD exporters not to be adequately covered against the above two risks.
Government complacency and inaction has failed New Zealand’s public and economy
It has become increasingly evident that New Zealand businesses and households have been wronged by the current government due to their complacency and inaction in dealing with the pandemic and therefore the economy over the past 12 years. month.
Consider the following: –
- “There is no rush to vaccinate the public because we don’t have Covid in New Zealand” – yeah that’s right!
- “This is not a race to get vaccinated, other countries have a more urgent need” – do they represent us or other people?
- “The Covid elimination strategy remains the goal” – many other countries have realized they have to live with Covid and have moved on. Our hermit kingdom has no risk management, no plan, and no goal to reopen the borders. Ardern’s bet in this regard has failed.
- The Prime Minister’s PR tour does not hide the fact that over the past 17 months the government has done nothing to increase the capacity of MIQ facilities, increase the capacity of intensive care in our hospitals, upgrade the MIQ reservation system towards something fair / that works and dramatically increase vaccination rates. when it became evident that this was the best pandemic / economic risk management policy. There is no urgency on anything.
- Due to the aforementioned incompetence of the government, Amazon has taken its second LOTR TV series to the UK and the Sail GP yachting is not coming to the South Island. New Zealand’s reputation for hosting and hosting international businesses, investments and events has been tarnished. Opportunities wasted by political ideology and narrow-mindedness.
- The unbridled fiscal and monetary stimulus measures last year created a speculative real estate bubble that could burst seriously.
- “Redefining” our immigration policy and “restructuring” the health care system amid a pandemic and chronic labor shortages in major industries is utter folly and underscores how much the current ministers of the Ardern government are far removed from reality at the front. economy.
- “Ready-to-go infrastructure projects” was a myth. South Auckland commuters will continue to endure hours commuting to work for a few more years as the government halted construction of the new Mill Road motorway. Dunedin has some nice three-lane highways with a few vehicles on them. Maybe Dunedin has smarter politicians lobbying Wellington!
Phew! all this on my chest, but what does it all mean for the economy and the value of money? The current “don’t plan, just react” approach is not positive for either side and needs to change.
* Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has been commenting on the New Zealand dollar since 1981.