Kiwi strength poses problems for RBNZ

Kiwi strength poses problems for RBNZ.

By Garry Dean (Sales Trader, CMC Markets New Zealand)

RBNZ Governor Graeme Wheeler is experiencing the same frustration felt by his predecessors, as he tries to address non-tradeable inflationary pressures in the economy via increases to the OCR. Governor Wheeler suggested in March that 200 pts of OCR tightening could be seen over two years, but in a world where many developed economies are maintaining rates close to zero, the lure of higher NZ rates is tempting foreign investors in search of yield. This has contributed to a significant appreciation in the TWI, which currently sits 2.3% above the level the RBNZ forecast in March. Effectively we are seeing a significant tightening of monetary conditions via the exchange rate, and this affects the tradeables sector of the economy, limiting the ability of the RBNZ to address housing market concerns via interest rate increases. To the credit of the RBNZ, they have looked beyond simply increasing the OCR, and have acted to introduce LVR restrictions which have slowed activity in the lower end of the market. The government have made the central bank’s task even tougher by failing to address the issue of foreign housing investment, one of factors that have driven Auckland property prices higher.

While domestic economic releases this week are largely second tier, the markets will watch Wednesday’s April migration data with interest, given March saw net immigration hit an 11 year peak. Treasury forecasts have been revised upwards, and show an increase in forecast net immigration to 38,000 in the September quarter – another hurdle in the path of the Reserve Bank as it attempts to control housing inflation. Tuesday night sees the result of the fortnightly GlobalDairyTrade auction, and with prices having fallen 21% in the past three months this result will be watched closely.

The RBNZ are clearly unhappy with the strength of the Kiwi dollar, prompting the recent threat of intervention from Graeme Wheeler, and suggesting an OCR increase on the 12 June is far from certain. There is some relief in the fact that the USD has shown signs of strength recently, as economic data generally points to an economy growing in momentum after the weather affected start to the year. The USD Index has risen to 80.0 recently, although a major contributing factor has been the recent weakness of the Euro as markets prepare for additional QE at the 5 June ECB meeting. A stronger USD will keep the Kiwi under pressure, with a test of short-term support at 0.8605 favoured. A break of this level sees a potential retest of major longer-term support at 0.8515.

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