Roger J Kerr questions the change in stance of the Reserve Bank and says conditions in the economy have not really changed to justify the renewed dovish tone

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Adrian Orr the dove: Illustration by Jacky Carpenter

Apparently bank traders in the NZ forex market were becoming increasingly concerned over recent months at the lack of volatility in the NZD/USD rate movements (hurting their monthly P&L numbers!).

The tight trading range between 0.6800 and 0.6900 was narrowing up as there was a total lack of fresh direction in the market.

Alas, Governor Orr of the RBNZ has ridden-in to the market’s rescue, yet again surprising all and sundry with an OCR Review statement more “dovish” (weaker economic outlook) than generally expected.

The immediate plunge in the Kiwi dollar last Wednesday afternoon, 27th March from above 0.6900 to just below 0.6800 has certainly lifted volatility. However, based on patterns witnessed over the last 12 months, post RBNZ statement related spikes up and down in the Kiwi dollar are never that sustainable.

Some might say that Governor Orr is rapidly building a reputation of taking some delight in catching the FX markets wrong-footed on the messages being delivered by the RBNZ. The chart below highlights subsequent NZD/USD exchange rate movements to the RBNZ’s four Monetary Policy Statements (“MPS’s”) over the last 12 months and the OCR review last week.

  • The 10 May 2018 and 9 August 2018 MPS’s were both more dovish than prior market expectations, causing immediate depreciation in the Kiwi dollar on the day. However, within a week or two the Kiwi dollar had bounced back up again. The NZD/USD rate did  subsequently move lower in 2018 due to a stronger US dollar, trade war uncertainties and a depreciating Aussie dollar.
  • The 8 November 2018 and 13 February 2019 MPS’s also surprised against prior market expectations. Both statements were more balanced on the economic outlook, whereas the markets were anticipating continuing dovish inferences from the RBNZ. Two subsequent sharp spikes upwards in the Kiwi were the result.
  • The OCR review statement on 27th March again surprised everyone with the Governor stating that the balance of probability had shifted to a greater likelihood of a future OCR cut. The local FX market sold the Kiwi down one cent to below 0.6800. However, interestingly, there was no “follow-through” Kiwi selling from the offshore traders on Thursday night. They either think the RBNZ is on the wrong track, or they (more likely) have absolutely no interest to trade the Kiwi dollar at this time.

Part of the RBNZ’s remit with managing monetary policy is not to cause undue foreign exchange rate and interest rate volatility. Seems that they may not be meeting this objective, however on the other hand it could just be that the markets “get it wrong” every time.  

The take-out from last week’s Kiwi dollar movements is not to expect continuing depreciation due to this subtle shift in stance or signalling by the RBNZ. The FX market’s responses are always short-lived and temporary. It always needs to be remembered that whether they will actually cut interest rates, or not, is totally dependent on the economic data that comes out over coming months.

What has really changed in the economy to justify a fresh monetary easing bias?

Conditions have not changed at all in the NZ economy since the last MPS on 13 February to justify the RBNZ’s renewed dovish tone.

Therefore, it is a deterioration in the global economic outlook over the last six weeks that has caused the RBNZ to signal the balance moving in favour of a rate cut. Perhaps Governor Orr was persuaded by a whole lot of other dovish central bankers at a recent conference he attended in Basle that the global economy was going to hell in a hand-cart. Global economic risks were certainly elevated late last year, but as this column has previously stated, things have changed dramatically since then:-

  • Equity markets have recovered somewhat, albeit over-hyped tech stocks are now under the hammer.
  • The Federal Reserve has done a U-turn on US interest rate hikes.
  • Considerable progress has been made on resolving the previous trade wars, and a Sino/US trade agreement can be expected sometime in April.

My view is that there is a better than 50/50 chance that the global economy will not weaken any further and recover somewhat as confidence is restored to business investors/traders by the impending China/US trade agreement. The trade agreement will also be a boost to the NZ economy already enjoying high export commodity prices. The labour market here remains tight, capacity utilisation is high and business firms are experiencing cost increases that they will eventually be forced to recoup through price increases. Hardly an economic environment supporting even loose monetary policy. I do not see the RBNZ dropping their inflation forecast to below 1.00% to justify a cut in the OCR. Eventually the still positive economic data will force the RBNZ to change their tune once again.

The economy is not being helped by low business confidence levels caused by an over-zealous Government toying with a capital gains tax and an over-zealous RBNZ wanting to have the highest capitalised banks in the world. Both are unnecessary policy changes that will only work to increase the cost of capital and restrict capital investment formation, at a time when the economy needs the opposite. We do make it hard for ourselves in “Gods Own” little country.

Despite the RBNZ’s clear intention to drive the Kiwi dollar lower, greater forces are at work in the form of a long-awaited AUD recovery, high commodity prices and eventually a weaker USD on the trade deal to keep the Kiwi dollar between 0.6800 and 0.7000 over coming weeks/months.

NZD/USD Exchange Rate

 

 

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NZD

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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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