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Roger J Kerr says the monetary policy 'penny-dropped' in both Wellington and New York for the RBNZ and US Federal Reserve respectively last week

Currencies / opinion
Roger J Kerr says the monetary policy 'penny-dropped' in both Wellington and New York for the RBNZ and US Federal Reserve respectively last week

  • Summary of key points: -

  • The Fed contemplate going slower as the RBNZ go faster and harder!
  • The Chinese push more economic stimulation buttons
  • Key chart support and resistance lines broken as the USD reverses engines

The Fed contemplate going slower as the RBNZ go faster and harder!

The monetary policy “penny-dropped” in both Wellington and New York for the RBNZ and US Federal Reserve respectively last week.

The need for higher NZ interest rates, sooner than previously indicated, was the hallmark of the RBNZ’s monetary policy statement – a belated recognition of the significant wage-push inflation stemming from the acute labour shortage situation New Zealand finds itself in. The hawkish statement was in stark contrast to the speech Governor Adrian Orr delivered less than two months ago where he indicated that he was nearing the end of the monetary tightening cycle!

The dramatic U-turn in outlook and comprehension of inflationary pressures was almost as good as the Reserve Bank of Australia’s U-turn on interest rate increases back in April. In addition to Governor Orr’s inconsistency in messaging, the monetary policy statement contained some weird claims that suggest the economic guru’s at the central bank are too tied to their economic models and don’t get out enough. The first erroneous statement was that house construction firms had full order books in front of them (page 12 of the statement). Anecdotal evidence from architects and engineers at the commercial coalface is that everything has come to a grinding halt in the residential building sector over recent months and forward orders for 2023 are close to zero. The second misguided statement was that export commodity prices had remained at elevated levels (also on page 12). Not sure that our dairy, apple and log exporters would agree with that given recent market price declines.

New Zealand’s economic outlook has certainly turned gloomier with this latest burst of monetary tightening. However, a contracting economy next year does not mean we are in store for a weaker NZ dollar. To the contrary, the NZD/USD rate looks set to make further gains towards 0.7000 as the US dollar weakens against all currencies and the widening NZ:US interest rate differential drives some capital flows into the Kiwi dollar on its own account.

The penny has also seems to have finally dropped at the US Federal Reserve judging by the change in tone in the minutes of their FOMC meeting held a few weeks back. More Fed members are now questioning the need for continuing interest rate hikes as more evidence becomes available that US inflation has peaked and other economic indicators (particularly housing) slump. Whilst Fed Chair Jerome Powell was still talking tough on monetary policy, inflation and interest rates at the media conference following the last Fed statement, the written monetary policy statement certainly laid the ground for a slowing or pause on interest rate hikes and an admission that are serious time-lags in a lot of their official economic data (particularly the shelter/rents component in their core CPI inflation figures).

There will again be a heavy markets focus on the November US inflation data, due for release on Wednesday 14 December. Another monthly increase in the core inflation below consensus forecasts of +0.40% will be further evidence to allow the Fed to go slower i.e. a weaker USD value. The Fed are also transfixed by the strong labour market, but another lower non-farm payrolls jobs increase for the month of November on Friday 2 December (lower than the +200,000 forecast) will also be USD negative.

The forward looking scenario that is being painted for the middle of the next year is one of the US bond and FX markets pricing-in upcoming interest rate cuts by the Fed, whilst at the same time the RBNZ need to hold our interest rates higher for longer as the domestic wage-push inflation proves difficult to pull back down. That is a recipe for NZ dollar gains on its own account in 2023.

The legacy being left by the Ardern Announcement Government, where their mis-management of employment and immigration policies has created a wage-push inflation fiasco which is now painful to fix, will be one of economic decline, rising unemployment and average households substantially worse off financially. The scary thing is that both Jacinda and Grant appear oblivious to what is happening in the deteriorating economy around them.

The Chinese push more economic stimulation buttons

Additional monetary policy loosening through cuts to official interest rates last week indicate that China is keener than ever ignite higher levels of economic activity as they show signs of emerging from the Covid lockdown problems. Further support is also being provided to second-tier lenders to the beleaguered property construction sector. As China re-opens to the world over coming months it has to be viewed as a net positive for the NZD and AUD currencies who are loosely tied to China’s fortunes.

Key chart support and resistance lines broken as the USD reverses engines

The turnaround in the US dollar’s direction over recent weeks has been swift and severe. As the chart below shows, the uptrend line that the US dollar index (red line) has held above all year since March has now been decisively broken to the downside. The depreciating USD broke below the uptrend support line at 110 and now trades below 106. It would not be surprising that the USD now depreciates all the way back to where it started at 96 on the index.

On this occasion the fall in the USD index has led the US 10-year Treasury Bonds yields lower. The bond yields (blue line on the chart) need to decrease to below 3.30% before their uptrend line is broken (currently 3.69%). A reducing US inflation rate and weaker data suggests that such a decrease is likely.

The NZD/USD gains over recent weeks to back above 0.6100 have broken above the NZD downtrend line (bold orange line) that has held firm over the last 12 months. Further Kiwi dollar gains over the next three weeks ahead of Christmas will see the 30-day moving average line (red) cross above the 90-day moving average line (green), a clear chart “buy NZD” signal that will prompt further buying.

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Source: CoinDesk


*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.

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10 Comments

It is too soon to talk about Ardern's legacy.  Her government may yet be re-elected.  National assumes a victory next year, but look what just happened in Victoria contrary to expectations.  Certainly if the current Labour/Green government is re-elected in NZ, then New Zealand's economic status will be like that of Argentina.  Investors will flee NZ when the Green Party forces Labour to bring in their wealth tax with the very low threshold that includes the family home.  By the end of the next term of Labour, NZ would have the same economic status as Zimbabwe.

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7

Good grief that's a hot take for Monday morning! NZ to have the same economic status as Zimbabwe because of *checks notes* a third term of the neoliberal, economically centre-right Labour government that has refused to do anything much radical with tax policy for five years...right.

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2

Luxon's abysmal performance on Sunday morning was a car crash. The election really is National's to lose and CL is doing his best in that regard.

 

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11

National's leadership vacuum since English's departure has been costing the nation dearly. The party have been far too quick to criticise the government on various policies, but haven't countered these with sound alternatives.

The trouble for the party is that it represents the interests of property speculators and several lobby groups. This prevents the Nats from holding reasonable policy positions on important matters such as immigration, environment, crime and tax.

Rather not speak up at all than anger funders and voters.

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7

Agreed - National is in the unfortunate position of hoping that Labour causes enough people enough pain that they would vote for a party whose sole purpose is to enrich the elite at the expense of the poor and middle class. They have zero thought through plans.... for example

- open the immigration flood gates (we dont have infrastructure or housing to cope. this wont sort house affordability, will make quality of life for all of us works and wont encourage businesses to improve productivity. will likely add to crime issues over time as immigrants are low skilled in a large number)

- stop 3 waters (i am no fan of 3waters either, but i dont want to be paying more for worse water infrastructure in 10 years, so what is luxons alternative

- drop high tax rate (most high rate  tax payers want better infrastructure, educ, healthcare not tax rebates.. what is their plan?)

- drop the tax changes for landlords (property investment has caused a financial mess and widespread inequity - they have no plans to address it)

- heathcare, crime etc etc - Luxon whinges but has no strategy or plan. other than to make his mates richer.

I can't see National win anything. Robertson knows it too - just watch him smirk as he delivers counter attacks to national. he almost cant wait for election campaigning.

Changing Luxon at this point will make no difference to National. the party is lost in property invertor MPS and the wrong donors for the current issues facing voters. it is very similar to the Torys vs labour in the uk (everyone hates the Torys but they know Labour there cant be trusted so better the devil they know)

Bestscenaio is a Green-NatFirst-Labour coalition. Progress will be made on the environment, Peters will hold back the worse of the economic and social ideas of labour and the country will make galacial progress but no huge messes

 

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5

Chicken or egg question really, build  infrastructure first and let the people come in or other way around?

Theres is not enough people paying taxes in this country so immigration is the only way…as long as they are here to pick up jobs we don’t want to do.

Forget about innovation, skills and productivity because this isn’t the country for it.

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2

The election is still a year away. JA chopped and changed policies from Labour weeks out from the election. Expecting a fully costed, worked policy platform from National now is ridiculous. I agree that there is significant cause for concern about special interest capture on some policies, but no less than we saw from Labour, many of which had already been rejected by voters at previous elections (or indeed, by Labour themselves after the election once they were elected).

I think after the 2017 election and the various walkbacks/failures, you can argue that any pre-election policy doesn't realistically matter. Holding it against National this far out is a bit of a waste of time. 

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Unemployment is too low. But we have 50000 people on benefits that need to be nudged into work. But at the same time he wants to import tens of thousands of people to work in sectors that cant find staff. So he knows those 50000 people are mostly unemployable and not wanted by his business owning voters. But the fact that they continue to receive a benefit still irks those same voters. Those same voters probably have rental property or two that they need tenants for as well.

Take the 10000 most capable of those 50000 and pay them 40k per year to attend 30hrs per week of vocational training for 12 months. Starting from remedial literacy and numeracy if required. Get them truly work ready and then give them directly10k on top of any wage earnings as a bonus if they complete 12 months of employment. Would be the best billion we ever spent.

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4

Unemployable people would soon make sure they were real employable if the free ride was removed. Work or go without.

 

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From Oneroof - CoreLogic economist - 

For the key property indicators themselves, after a quiet year for sales activity in 2022 (perhaps around 67,000 deals), things don’t look much better in 2023, as higher wages and rising net migration are offset by a soft economy and higher mortgage rates. We’d also go along with the view that property values will fall by 20% in total by the end of next year, although that would still leave them 15-20% above pre-Covid levels.

I wonder, by what logic, falls will be limited to pre Covid levels.    I would have thought that prices are now being driven by affordability and interest rate levels.   You have to go back to Dec 08 to find the OCR at 5%, it was falling like a knife at the time.    14 years of cheap credit has had a huge impact on house prices.

 

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