Forex Investment and Currency Trading

The NZ economy grew by an estimated 3% in the fiscal year ended March quarter 2008 (actual data reported June 27) but finished the fiscal year with a limp.

While the RBNZ left its key OCR at 8.25% in June, the accompanying decision and monetary policy statement (MPS) was much more dovish. As in the recent Financial Stability Report the central bank is worried about the future impact of the falling housing market on spending. It assumes a multi year 22% real depreciation of house prices (about half the real fall post the 1970s oil shock) and on that basis the household saving rate to improve from around -12% at present to -5% by the end of the projection, which is a major headwind against spending pick up even with tax cuts. The bank suggests that soaring global energy and food prices could push inflation to a peak of 4.7% in 3Q 2008 but says inflation should return comfortably inside the target band over the medium term. Whereas the April decision concluded that “the OCR will need to remain at current levels for a time yet”, the June decision finished with “we are now
likely to be in a position to lower the OCR later this year”.

In its economic assumptions, RBNZ expects just -0.3% qoq and +0.2% qoq economic growth in the first two quarters of calendar 2008 and 0.9% GDP growth for the fiscal year ended March quarter 2009.

The NZ May 22 budget delivered larger and earlier than expected tax cuts (October rather than next April) and frontloaded some of the pre announced spending increases so that the fiscal stimulus this fiscal year turns out to be 2.3%/GDP, double that previously assumed.

On June 9, the NZ Treasury issued its latest monthly economic assessment, affirming its 1.5% growth forecast for FY 2008-09, contrasting it with the central bank’s 0.9% forecast. Treasury says: “The main reasons for differences between Treasury and the Reserve Bank forecasts centre on different judgments around the terms of trade, house prices and the labor market, with Treasury more optimistic on each of these.” Treasury may also assume a bigger ‘early Easter’ impact on this year’s data. The switch of the Treasury to be more optimistic than RBNZ is unsurprising with a general election later this year plus the need to justify a larger fiscal stimulus without pushing the budget into negative territory.

Other Considerations

Commodity prices have topped out in New Zealand even as they have soared further in Australia and Canada.

Monetary Policy and the Exchange Rate

Market continues to think that the NZD TWI could fall further in 2H 2008. In its June MPS, the RBNZ assumes the NZD TWI (70 at the time of its release) to average 67.8 in 2H 2008 and 65.9 in 1H 2009; i.e., a relatively slow and orderly depreciation. But it does acknowledge that “a sequence of weak economic data may lead to a more rapid and pronounced currency depreciation.”

The bank also notes that “weighing on the NZD at the margin has been a fall in the value of new Uridashi and Eurokiwi bonds issued”, a clear change from its prior statement when it said that these bond issues were propping up the currency. (RBNZ did acknowledge that carry trades in NZD vs JPY had filled some of this vacuum). In this regard it is also notable that maturities of international bonds denominated in NZD accelerate sharply later this year, starting in September.