NZD: The Desk View
- NZD has broken higher on USD weakness over the last week. We expect this to continue as both NZD and AUD rally.
- Our thoughts are that the dollar will continue to struggle as the week goes on but the market will watch the ECB on 30
August for a lead for the EUR.
- The US market will digest the implications of the expected downward revision to US Q2 growth (taking the outcome into
negative territory in our view), two measures of consumer confidence and the Chicago PMI later in the week.
- The NZD enjoys important support at 0.4360 and then at 0.4290. Resistance is now up around 0.4450 with major
resistance at 0.4513.
One week range: 0.4360/0.4513
One month range: 0.4250/0.4650
New Zealand Exchange Rate Forecasts
27 Aug 3M 6M 12M
NZD/USD 0.4417 0.44 0.46 0.48
Source: Deutsche Bank
NZD/USD and NZD/AUD - Last 2 Weeks
Source: DB Global Markets Research
Fixed Interest
- NZ markets continue to maintain the working assumption that the RBNZ’s easing cycle ended back in May and that some
tightening of policy settings is likely early next year. This accords with our own central view.
- However, we continue to believe that the near-term risks favour a further cut in the RBNZ’s OCR rather than an early
tightening. Concerns regarding the global growth outlook and the improved performance of the NZD suggest that a rate
hike this side of Xmas is quite unlikely in our view.
- Over the past two weeks, NZ 10Y bond yields have drifted up a little, mainly on the back of weakness in US Treasuries.
We think that NZ 10Y yields will trend around the 6.50-6.75 region over the next 3-6 months.
- A busy week of US data lies ahead which should shed further light on both the extent of recent economic weakness and
prospects for recovery. Greenspan also speaks on Friday.
New Zealand Interest Rate Forecasts
27 Aug 3M 6M 12M
Official Cash Rate 5.75 5.75 5.75 6.25
10 Y Bond Yield (11/11) 6.61 6.50 6.75 7.25
Source: Deutsche Bank
90 Day Bills and 10Y Bond Rate - Last 2 Weeks
Source: DB Global Markets Research
Dollar Bloc Economic Diary
Mon 27 August US Existing Home Sales (Jul) [DB 5.25mn; market 5.3mn; previous 5.33mn]
NZ Overseas Merchandise Trade - Provisional (Jul) [DB: -$25m mth/$78m ann;
market: $26m mth; previous $139m mth/-$22m ann]
Tue 28 August US CB Consumer Confidence (Aug) [DB 118.0; market 117.5; previous 116.5]
Can BoC monetary policy meeting (09:00 ET) [DB expects a 25bp cut]
Wed 29 August US Q2 GDP (prelim) [DB -0.3% saar; market 0.0% saar; advance estimate 0.7% saar]
Aus Balance of Payments (Q2) [Current A/C Deficit DB $3.2bn (1.9% of GDP); previous $4.7bn (2.8% of GDP)]
Thu 30 August US Personal Income (Jul) [DB 0.3% mom; market 0.3% mom; previous 0.3% mom]
US Personal Consumption (Jul) [DB 0.3% mom; market 0.1% mom; previous 0.4% mom]
Aus International Trade in Goods and Services (Jul) [DB -$A975m; previous -$A537m]
Aus Building Approvals (Jul) [DB 8% mom; previous 3.0% mom]
NZ Producers Price Index (Q2):
Inputs [DB 1.8% qoq/ 8.5% yoy; market 1.2% qoq; previous -0.9% qoq/7.8% yoy]
Outputs [DB 1.0% qoq/5.8% yoy; market 1.2% qoq; previous -0.2% qoq/5.7% yoy]
Fri 31 August US U of M Consumer Sentiment (Aug - final) [DB 93.5; market 93.5; previous 92.4]
US Chicago PMI (Aug) [DB 43.0; market 39.6; previous 38.0]
US Factory Orders (Aug) [DB -1.5% mom; previous -2.4% mom]
Aus Retail Trade (Jul) [DB -1.0% mom; previous 1.1% mom]
Aus Motor Vehicle Registrations (Jul) [DB 7.0% mom; previous -4.8% mom]
Aus Financial Aggregates (Jul) [Previous 0.7% mom]
NZ NBNZ Business Survey [Confidence: DB 19, previous 16.9;
Trading Prospects: DB 37, previous 36]
NZ Wholesale Trade Survey (Q2) [previous -6.1%qoq/2.2% yoy]
NZ Value of Building Work put in Place (Q2) [DB 6.0% qoq/ -4.0% yoy;
previous -6.8%qoq/26.9% yoy]
Local data releases:
The week begins with the first release of merchandise trade data for July. With the commodity export season winding down
and non-commodity exports constrained by the global slowdown, we expect this month to mark the beginning of the usual
run of monthly deficits. We look for a deficit of NZD25m. However, on a merchandise trade basis (exports measured in FOB
terms and imports measured in CIF terms), this outcome would lead to the first annual trade surplus since April 1995.
Lower petrol prices and a higher NZD led to a reduction in producer prices in Q1. However, these factors have reversed
in Q2 and their influence is likely to have been reinforced by improved prices for New Zealand’s export commodities, as
demonstrated by the ANZ Commodity Price Index. As a result, we expect the Producers Price Index to record a further
substantial increase in both input and output prices in Q2. However, declining commodity prices and a stronger NZD
should see these pressures relieved somewhat over H2 2001.
Consumer confidence fell a little this month, probably dented by ongoing concerns about the drought-induced power crisis
(in particular the foreshadowed increase in power prices and the risk of power black outs). Similar concerns are likely
to have weighed on business confidence this month - perhaps more so as businesses are likely to have been affected more
significantly by the rise in wholesale power prices. As a result, we would not be surprised if the August instalment of
the NBNZ Business Survey showed a decline in general business confidence and, to a lesser extent, firms’ own trading
prospects, when measured in seasonally adjusted terms. However, given the usual seasonal variation, the unadjusted
headline indicators may still show optimism holding firm, if not rising marginally. The market will also pay attention
to the various pricing indicators for information on how inflation pressures are evolving.
The week concludes with two partial indicators of Q2 GDP. Building consents data suggests that construction activity is
likely to have rebounded somewhat in Q2 - we look for a 6% qoq rise in real building work put in place. Given a general
bounce-back in the economy - our preliminary Q2 GDP pick is 1.0% qoq - the wholesale trade survey should also record a
decent rise in wholesale sales.
International Themes
United States: The Fed cut rates by 25bp and retained its easing bias. We believe that the seeds of a gradual economic
pickup have been planted and that, barring a further collapse in stock prices or an unexpected twist in the economic
data, the Fed’s easing campaign is over.
Euroland: HICP inflation has fallen for two consecutive months since peaking in May and further falls are likely in the
months ahead. Core inflation, as measured by our proprietary DBCI indicator, continued to edge up in July. The good news
for the ECB is that we have observed the first decline in core goods prices, no doubt linked to the weakness of economic
activity, suggesting that the peak in overall core inflation is not far away. Because of the ongoing distortions, there
is confusion as to how M3 growth figures should be interpreted. That said, the ECB we think has opened the door to a
rate cut despite M3. We conclude that the ECB is in a position to cut rates at one of its two upcoming meetings. The
latest survey shows that 41 of 55 analysts expect a rate cut this week.
Canada: The key event in the peripheral dollar bloc this week is likely to be the BoC’s policy meeting, where we expect
a 25bp cut in rates. However, the jury is still out on whether the expected cut will mark the trough in rates in Canada.
Commentary: Migration flows turning back in New Zealand’s favour
Over the past four years, New Zealand has exported a net 31,000 people - around 0.8% of its population - to the rest of
the world. This outflow has revived the “brain drain’ debate that was a feature of the 1980s, when significant net
outflows were also recorded. However, more recent data suggests that migrant flows may now have begun to turn in New
Zealand’s favour. A net 1140 people moved “permanently’ to New Zealand in July - the strongest inflow recorded since
February 1997. Given widespread skill shortages, at first glance a rise in skilled migrants might seem positive for an
easing of pressures on labour costs and inflation. However, while we agree that skilled migrants have a positive impact
on overall economic performance over the medium term, in the near term, we think that migrants are likely to contribute
much more to aggregate demand in the economy than to aggregate supply, thus contributing to, rather than alleviating,
pressures on inflation.
Current net inflows remain modest by the standards of the mid 1990s. However, the turnaround in migration trends is
still in its infancy, and it remains to be seen where the trend will settle over coming months. Although migration data
usually attracts little if any market attention, we think it is worth keeping an eye on migration trends over the period
ahead - we are sure the RBNZ will be doing so. If recent inflows are sustained over coming months, or accelerate
further, in our view this will provide another reason for the RBNZ to leave the OCR on hold over the remainder of this
year, with the prospect of a first tightening in Q1 2002. Interestingly, migrant flows have shown a reasonable
correlation with the NZD over the past decade. While there are reasons to expect some causality (due both to the impact
of migration on the RBNZ’s policy stance and, to a lesser extent, the financial assets that migrants bring with them),
the relationship also reflects the broader correlation that both migration patterns and the NZD exhibit with, for
example, the relative performance of the New Zealand and global economies.
Population Growth and Building Approvals Net Migration and the NZD
Source: DB Global Markets Research, Statistics NZ Source: DB Global Markets Research, Statistics NZ