Forex Investment and Currency Trading

March housing finance

The total number of loans to owner-occupiers fell by 6.1% in March, following a 6.8% drop in February. Prior to that housing finance was relatively resilient.
One word of caution - it is possible that weakness in March was exaggerated because of Easter. The ABS advise that they (attempt to) adjust for this effect.
The impression is that weakness in housing finance is genuine. There are a number of indicators pointing to a significant interest rate impact (eg retail sales, consumer confidence, auction clearance rates, dwelling approvals and house prices).
Australians are delaying moving into the housing market as significantly higher [...]

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When the global financial turmoil started last July, the trade weighted NZD initially fell by 16% over the course of a few weeks, its plunge as a risk-sensitive currency then arrested by the Fed’s intra meeting discount rate cut in mid-August. Since then the trade weighted NZD has returned to a more stable relationship with its trade weighted 2-year yield spread until mid-April. In the four weeks since mid-April, the NZD TWI has continued to fall but yield support for the currency has dropped away even further. Yield spreads are back to the lows of last August whereas the NZD [...]

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Contrary to anecdotal evidence, Japanese retail investors are still piling into overseas bonds.
The more interesting retail story, however, is the recent concentration of JPY leveraged shorts in NZD/JPY. Unwinding of these positions will compound AUD/NZD strength on the back of real money reallocation.
Retail investors still selling JPY
JPY’s resilience in recent months – JPY is the second best performing G10 currency after CHF year-to-date - is frequently attributed to Japanese retail investors reversing purchases on overseas assets as signs of domestic economic weakness have reduced risk tolerance. Recent flows data, however, provide no support for this hypothesis – retail investors have [...]

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NZ cash rates are a long way above real neutral

Reflecting increasing downside risk to activity stemming from a much weaker housing market, tighter credit conditions, and a deteriorating global growth backdrop, market brought forward the first rate cut to Q4 2008 from Q1 2009. An extra 50bp of easing next year is also expected, taking the cash rate to 6.25% by Q3 2009. In the face of continued above target inflation in 2008, 200bp of easing may look aggressive, but given that the real neutral cash rate is just above 5%, we would argue that such magnitude of easing is [...]

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Despite this core CPI result being about 0.2ppt above where market thinks the Bank expected underlying inflation to print, market does not believe that it will trigger an immediate May rate hike. However, the Bank’s rhetoric will now change from ‘clearly on hold’ to a tone suggesting the restoration of a tightening bias.
The Reserve Bank will be unnerved by this result. Last week they would have been expecting underlying inflation to have printed 4.0%yr, up from 3.6%yr last quarter. Today’s number is 4.23%yr, a significant overshoot of their already pessimistic expectations. However, such is their commitment to relying upon the [...]

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