Forex Investment and Currency Trading

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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In a relatively quiet week, all eyes will be on the Australian quarterly inflation numbers and the RBNZ decision.
Australia: In an otherwise quiet week finishing with the Anzac Day holiday, some of the suspense has been taken out of the quarterly CPI data on Wednesday because: (a) there is a pretty good forecast of the outcome from the monthly experimental inflation gauge; and (b) the RBA has already said: “CPI data for the March quarter…likely to show inflation of around 4 per cent … Underlying inflation … (is also) expected to rise.” That is, markets have already priced in a [...]

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In the previous two New Zealand recessions, falling house prices detracted significantly from annual CPI inflation. Today, the NZ housing market is already on the edge of deflation. House prices could fall as much as 30% from peak to trough. Even on conservative estimates, such a fall in house prices would knock more than 1 percentage point off annual CPI inflation and reinforces the view that the Reserve Bank of New Zealand (RBNZ) will be forced into easing rates sooner and more aggressively than the 90bps of cumulative cuts the NZ interest rate market is discounting over the next 12 months. [...]

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Australia: There is a busy fortnight ahead for RBA Governor Stevens and his department, as they continue to react to changes in market and macro risk in this volatile environment. This Thursday includes a speech on “Recent Financial Developments’ to a Euromoney conference in Sydney, followed a couple of hours afterwards by the semi annual RBA semi annual Financial Stability Review.
The following week brings the RBA’s monthly rate decision on Tuesday (April 1) and Governor Stevens’ semi-annual appearance before the parliamentary economics committee on Friday (April 4). The FSR is important in light of the RBA observations about the recent tightening [...]

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