Economists expect a further tightening of interest rates in New Zealand in the coming months after the central bank last week delivered its third straight rate hike since October, fueled by growing risks of higher inflation.
The Reserve Bank of New Zealand (RBNZ) lifted its official cash rate by 25 basis points to 1%, widely expected by the market. The bank raised its projected cash rate increase to a peak of around 3.4% in the third quarter of 2024 against a peak of 2.6% in its previous guidance issued in November 2021.
"The committee agreed it remains appropriate to continue reducing monetary stimulus so as to maintain price stability and support maximum sustainable employment,” the central bank said while disclosing plans to taper its bond-buying program beginning in July at a pace of NZ$5 billion per fiscal year, subject to market conditions.
The bank now expects annual inflation to return towards the 2% midpoint of its target band in early 2025 versus its previous forecast of around the third quarter of 2024. The revised forecast comes as New Zealand’s inflation rate in the fourth quarter of 2021 rose to 5.9%, the highest since the second quarter of 1990 and almost double the top of the RBNZ’s 1% to 3% target band.
While many economists expect the RBNZ to further lift interest rates as it had hinted, Capital Economics’ Ben Udy said a more aggressive hiking cycle will likely weigh on the economy in 2024, "so we still think the RBNZ will eventually have to reverse course.”
Back in August, the central bank delayed an anticipated rate hike, which was widely expected to be the world’s first in the COVID-19 pandemic era, after the government reimposed a nationwide lockdown to contain a single case of COVID-19. This underscores the RBNZ’s willingness to hit the brakes in tightening its policy to provide support to the economy in times of pandemic and inflation-related shocks.
The RBNZ’s hawkish policy stance pushed the New Zealand dollar to a near five-week high of 67.42 US cents on Feb. 23, while the Australian dollar likewise surged to an over five-week high of 72.27 US cents on Wednesday. Both currencies, however, pared gains on Friday, indicating the presence of sellers and a bearish outlook for the NZD.
The outlook comes as trader have maybe priced the extent of the RBNZ’s rate hikes this year, with the US Federal Reserve also widely tipped to deliver around four rate hikes in 2022 and 2023 after the inflation rate in the world’s largest economy surged to a 40-year high of 7.5% in January.
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The rise in New Zealand house prices over the past 12 months has been extraordinary. As a result, Finance Minister Grant Robertson has moved to increase the scope of the Reserve Bank's concerns. Moving forward, the Reserve Bank must consider the price of NZ property in conjunction with the other issues it monitors and controls.
Since its new mandate, the Reserve Bank has begun to flesh out its understanding of the country’s housing crisis and how it will affect its policy decisions.
We have a relatively fair number of economic events this week ahead. However, they are relatively significant in their effect on the financial markets and further fundamental guidance.
We've seen risk-on in currency markets recently, with many pairs against the U.S Dollar rallying on confidence that the economy will fare better in 2021. GBP/USD. Broke 1.40, while NZD/USD and AUD/USD both broke 0.78 and 0.73, respectively. Oil has been rallying on supply restriction due to middle east tensions and the snowstorm currently taking over Texas. Here is your week ahead.
With China stomping the virus faster than any country, their road to recovery has been patchy. With a couple of flare-ups in community transmission similar to that of New Zealand, China acted swiftly to secure the cases, ready emergency and hospital units, and shut the Coronavirus. With their economic recovery fully underway, Yi Gang has stated that China's central will not "prematurely" exit from its supportive monetary policies. "Looking forward, I think our monetary policy will continue" and that "we will keep a delicate balance between supporting the economic recovery, at the same time, preventing risk."
With the strength and the interest in the Chinese Yuan skyrocketing in 2020, the PBOC will introduce some measures to bring down the Yuan's strength as it is fundamental to their exports. With that said, analysts predict the PBOC to lower the headline 1-year rate from 3.85%.
With strict lockdowns imposed earlier in 2020, New Zealand has stomped the virus, China has, and life for its citizens has returned to a relative normal. With a flare-up in Auckland's community cases last week, Auckland was put in a snap lockdown for three days for the government to assess the situation. They had come out of that lockdown after the three days but still face social distancing and capacity constraints in level 2.
However, with the domestic economy has been in full swing before the snap lockdown, analysts predict retail sales to stay healthy at 26.7% growth, slightly lower from the 28% growth the previous quarter.
Regarding the RBNZ's interest rate decision, the mandate for the central bank of New Zealand is like many other central banks: Employment and Price Stability. A mandate they do not have is the control of house prices. However, with house prices skyrocketing almost 20% the past year, there has been pressure from politicians and analysts for the RBNZ to implement pricing controls.
The bank has reinstated loan-to-value ratios from first home buyers and investors, requiring investors to front up 40% of the house price as a deposit when purchasing a house, stating that the initial removal of LVR's has done its job.
The initial optimism on negative rates has subsided on the New Zealand economy's incredible bounce bank. Many banks are now rescinding their calls on negative rates, with banks such as ANZ calling a 15-basis point cut from 0.25% to 0.1%. ANZ's economists stated that "If the housing market and domestic economy maintains momentum well into autumn, the RBNZ will not cut again at all." However, they further stated that "If Covid-19 returns to our shores in a significant way, a negative OCR will once more be game on."
United Kingdom's vaccination program is leading the charge for their recovery. With their seven-day average way down from all-time highs, the start of the recovery is near for the United Kingdom. Nearly 18 million people in the United Kingdom had received at least one Coronavirus Vaccine dose, around 27 doses per 100 people. These were aimed at citizens aged 70 and higher, alongside healthcare workers, who have accounted for 88% of the United Kingdom's Coronavirus deaths. Analysts predict
the 3-month rolling unemployment rate to rise slightly from 5% to 5.1% this week ahead.
Like that of the United Kingdom, the vaccine has led the charge for the recovery in the United States. Seven-day averages are nearly three months now, with over 61 million doses of the vaccine, or around 18.6 doses per 100 people. With Jerome Powell continuing to pledge his unwavering support for the American economy, alongside an optimistic 1.9 trillion-dollar stimulus, the potential for a rebound in the U.S economy may be on its way. Analysts predict a slight nudge higher in GDP growth at the end of the 4th quarter, up 0.1% to 4.1%, compared to 4% in the previous quarter.
A light week ahead events-wise. However, the events are heavy. Stay say, and trade safe.
NZD/AUD is approaching a robust congested area at around 0.925. A downwards channel sees a possible move further lower may see the pair come a level below 0.9. However, an action lower will be dictated on which economy puts the brakes on monetary stimulus first.
During the peak of the Coronavirus, the best method of suppressing the virus was not evident. This is where Australia and New Zealand's strategies diverged.
Australia went for a loose lockdown, allowing citizens to roam freely without restricting them to their houses. They did enforce social distancing laws alongside mask-wearing.
New Zealand went for a strict lockdown, only allowing citizens to leave their house to exercise, get groceries and go to the doctors. Essential workers were given a pass to go to work.
It became evident as to what method was more successful. There were critics initially questioning New Zealand's method, pointing to the likes of Australia and Japan, who were getting similar results to New Zealand per capita, however, without the devastating economic cost of a lockdown. Those critics were soon to be silenced after New Zealand slowly pulled out their nearly six-week lockdown, well on their way to recovery. On the other hand, Australia had a devastating second wave that forced the inevitable – a strict lockdown. However, by then, New Zealand was back open and running.
With a head start in Australia's economic recovery, New Zealand has been showing signs of slowing its fiscal and monetary policy measures. Recently, The Reserve Bank of New Zealand (RBNZ) re-instated policies regarding mortgages issued by banks, which require house investors to front up 40% of the house sale price if they want to purchase a house. These were temporarily removed during the peak of the Coronavirus in 2020 to stimulate the economy. However, they were placed back after the national median price jumped up to $730,000, up 19.3%.
However, a country that is heavily dependant on tourism is struggling due to the strict border controls. Westpac analysts predict New Zealand's GDP to fall 0.7 over the six months to March due to the lack of tourists. Dominick Stephens stated that "tourism is highly seasonal, and there is normally a strong net inflow of people into the country in the summer months. The absence of visitors was felt keenly in the December quarter, and will be even more so in the March quarter, which would have otherwise been the peak tourist season."
Australia has not had a good time dealing with the Coronavirus. Outsourcing security of their quarantine to a private company did not end well, with the spread of the virus being exacerbated by the security guards sleeping with the Coronavirus guests. This, alongside lax state line restrictions, pushed Coronavirus cases up, forcing two lockdowns. However, there is some optimism in the Australian economy, with many of their commodities' prices reaching all-time highs. Furthermore, the Reserve Bank of Australia stating that the "recovery in the second half of 2020 had been faster than initially expected."
I believe the economy that starts tapering monetary policy programs will first see their currency strengthen against the other. With the RBA stating that they are "committed to doing what it reasonably could to support the Australian economy" and that "significant monetary support would be required for some time," it looks like New Zealand in the mid to long term will be raising rates before Australia will, given the actions they took with loan-to-value ratios, alongside the consistent recovery from the Coronavirus.
As the news cycle slows, with the election in the past alongside initial vaccine hype fading away, it is essential to realize that not only is the Coronavirus continuing to ravage the economy, it continues to ravage the families and lives of many around the world.
Many have turned the Coronavirus into a statistical exercise, looking into the future when we eventually look past the Coronavirus. However, it is currently a present problem, with present consequences. Keep this in the back of your head when you trade and invest. Here is your week ahead.
Like many countries in Europe, Germany is experiencing a spike in cases larger than the first wave. They recently recorded 23,000 new cases yesterday. This has directly affected service sector activity, with HIS Markit's flash services PMI's fell to 46.2 from 49.5 in the previous month. Remember, a print below 50 entails a contraction in manufacturing. Analysts forecast Germany to post its deepest recession since World War Two.
In terms of the most frustrated, I am at a country in terms of their Coronavirus response; I am most frustrated in the UK. They had the resources to implement a robust early Coronavirus response. However, Bureaucracy and trying to balance economic damage and human life has placed the UK on its knees. At its peak, the UK recorded over 34,000 daily Coronavirus cases.
After placing a lockdown on citizens, Prime Minister Boris Johnson plans to end the lockdown on 2nd December. However, daily Coronavirus cases still rack up, around 20,000 per day. For reference, New Zealand and Australia lifted restrictions once there were consistently zero community Coronavirus cases. However, the second lockdown could not push the UK's PMI's further down, printing 45.8 with an analyst consensus for 42.5. However, a third wave will push this figure further down.
While the Coronavirus stops many businesses from operating, one sector that was affected less was freight. However, with Australia heightening tensions with China, their largest trading partner, their Trade Balance may see a drop in the next print. Canberra's Officials stated that reports on Chinese authorities telling Chinese buyers to stop purchases of Coal, copper, wine barley, sugar, lobster, and timber as "deeply troubling.
"On the other side of the bond, Beijing has accused Australia of "anti-China hysteria," about Australia prompting an investigation into the origins of the Coronavirus vaccine in China. The previous trade balance was 5.63 Billion.
Japan is one of the only countries that are experiencing the third wave. Each consecutive wave has been larger than the previous in Japan. The method they have adopted, called the "Japan Model," has effectively curbed the spread of the virus in the country.
However, as the third wave is currently in full swing, experts state that the strategy is approaching its limits. Kuroda predicts that "the economy is likely to hit bottom around April-June and is expected to continue improving as a trend" and that it "will help price growth turn positive and gradually accelerate toward [their] 2% inflation target." He further stated that if they hit their 2% target, an "exit from [their] massive stimulus program will come into sight." However, he believes it's currently premature to do so at this stage.
Having beaten the Coronavirus, New Zealand is well on its way to its recovery. With the RBNZ removing LVR's and lowering interest rates earlier this year to cushion the economic effects of the Coronavirus, they have placed it back, quoting "financial stability". Interest rates continue to be at record lows, allowing investors and first home buyers to attain record-low mortgage rates. This has pushed the average house price of over a million dollars in Auckland for the first time.
House prices have been a heated topic with politicians and citizens of New Zealand, with buyers struggling to get into the market and owners going all to increase their assets. However, the RBNZ refuses to implement policy to house prices, stating that "that is not their mandate", and that their mandate is employment and inflation. Orr's speech this week ahead may further see him cement RBNZ's stance on house prices.
The United States recorded 198,585 new cases of the Coronavirus on the 20th November, just shy of the somber record of 200,000. With the country recording an annualized rate of 33.1% during the third quarter showing the effects of government stimulus and quantitative easing by the Federal Reserve, many analysts predict a slowdown in the couple of quarters to come. Aneta Markowska, Chief Financial Economist at Jefferies, wrote in a report to clients on Thursday that "The outlook for Q4 is very shaky in our view" and that "The economy has already lost a lot of momentum over the summer."
Not as a busy week ahead compared to previous weeks. However, news on a Coronavirus vaccine should be watched out for, as it could trigger a risk-on / risk-off event in all assets across the markets. Stay safe, trade safe.
Trump skipped the G20's "Pandemic Prepardness" event to play Golf on that beautiful, cloudy day.
The New Zealand dollar against the U.S. dollar is facing a critical fundamental event tomorrow: RBNZ's Interest Rate decision. New Zealand has been fortunate that the government's decision to go "hard and fast" has meant citizens have had relative freedom through Christmas and New Years'.
The NZD/USD is currently sitting at around 0.732, up around 1.37% over the past week. Bulls are looking for positive signs to take the pair 0.74 and higher, such as a lifting in the extraordinary bond purchases the RBNZ is engaging in.
New Zealand was also in a fortunate position that many of the country's citizens could afford. A lockdown and was employed through the lockdown.
With a mix of government support alongside jobs that enabled work from home, many citizens were in a position to save during the lockdown periods. Pair this with the Reserve Bank of New Zealand, removing loan to value ratios to stimulate the economy, and we have a legendary demand and house price increases across the board as investors and first home buyers take advantage of easy borrowing.
However, the RBNZ has realized that the temporary lifting of the loan-to-value ratio has done its course. They recently announced that they would place these restrictions back, requiring investors to have at least 40% of the house price they want to purchase as a deposit.
Now, analysts are looking at whether the RBNZ will translate viewpoint into monetary policy. As it stands, analysts predict the RBNZ to hold rates as is at 0.25%. If so, it is likely to state that they will be willing to keep rates well into 2022. A sudden rake hike makes signals the RBNZ may be more bullish on the New Zealand economy. Stephen Toplix, head of research at Bank of New Zealand in Wellington, stated that the RBNZ "simply must be less dovish" than it was in November because inflation has portrayed a more robust.. economy than was expected."
To be clear, house prices and housing demand are not an exact bearing of economic growth. Nor is it a mandate for the Reserve Bank of New Zealand. However, rampant leveraging in higher loan-to-value ratios implicitly affects an order the RBNZ does preside over: employment. To RBNZ, riskier loans place higher pressure on borrowers to make higher payments, possibly putting them into a position of insolvency from the smallest change in their financial conditions.
NZD/USD - A pair to watch tomorrow.
This pair has been ranging in a consistent bound for the past seven or so years. If we have a look at a longer-term timeframe,
We can see that the pair has been ranging between $0.8 and $0.95, with a significant support/resistance area at 0.9. Currently, the price is just under 0.90c, at 0.899.
New Zealand has rallied on the government's consistent handling of the Coronavirus, and more recently, the RBNZ comments suggesting that negative rates are less likely to be on the table, implying a better than expected in the New Zealand recovery.
However, upbeat sentiment on a Pfizer vaccine before the end of the year has spiked a risk-on rally, especially in the Oil markets. The Canadian Dollar is known for its commodity correlation like the Australian Dollar, in which the CAD strengthens/weakens depending on the price of commodities like Oil. In the past five days, Oil has rallied over 7% on Pfizer vaccine's news. Oil rallying tends to strengthen the Canadian Dollar.
However, the Canadian Dollar has not strengthened against the NZ Dollar, with recent RBNZ's comments further strengthening the NZD. However, as we approach this significant support/resistance area, alongside further positive news on a Coronavirus vaccine before year-end, may end the Bull rally in the New Zealand dollar and heavily reject that 90c resistance level.
There is not much news following the Coronavirus situation in Canada. However, the country has experienced a recent Coronavirus spike due to its non-essential lockdown restrictions. The government faces a similar curve to that of the United States and in Europe.
Due to this, top deputy Carolyn Wilkins from the Bank of Canada stated that the country "is likely to exit the pandemic with a lower profile for potential output, leading to a significantly diminished ability to generate goods, services, and incomes on a substantial basis." She also states that "Canada's plan to lift immigration levels will boost potential output growth overtime."
On January 11th, China announced its first death related to the Coronavirus. 120 Days later, the pandemic has wreaked havoc in the lives of all. This week ahead marks many important indicators that, in regular times, would be an indicator of the prosperity of the global economy. We now look to the same indicators and quantify the damage Coronavirus has done to our lives and the global economy. Note: Dates are in NZST.
The People’s Bank of China has been wary of cutting their lending rates in favor of direct approaches, such as bond issues and direct lending – a stark contrast to how many central banks tackled the issue Coronavirus. However, due to implementing one of the strictest lockdown measures at the epicenter of the virus, consumer demand has been shattered. The PBOC in a statement stated that “ there was no foundation for persistent inflation or deflation in the country” Analysts predict a 3.7% inflation rate, down from 4.3%.
In contrast, the US government has favored bolstering financial stability of households – providing them with stimulus checks to keep the economy afloat. This is on the back of the Federal Reserve announcing an unlimited quantitative easing program. These measures are textbook ways in which the rate of inflation increases in the long run. However, the consensus has been that it is more important to keep the economy afloat and worry about inflation later. Analysts forecast a 1.7% inflation rate, down from a previous 2.1%.
With one of the lowest coronavirus fatalities in the world, New Zealand has been praised for its swift and immediate response to the threat of the Coronavirus. However, this has not shielded them from the economic shortfalls a retraction of demand has caused. With the RBNZ expecting to double their quantitative easing measures, it remains to be seen whether their aim of keeping inflation between 1% and 3% is feasible. Analysts predict the RBNZ to keep interest rates at 0.25%.
With having the worst fatality rate concerning the Coronavirus of around 16%, analysts forecast the UK to revise their GDP rate down from 0.1% to -2.9%. This is on the back of their Prime Minister, Boris Johnson contracting the Novel Coronavirus. The UK is set to slowly come out of their 7-week lockdown as their infection rates slowly decline.
With the Eurozone thriving over the free travel between Europe’s borders, lockdowns across the continent have severed this fundamental backbone of the European nations. Alongside devastating Coronavirus figures from the UK and Italy, analysts are forecasting a 3.3% drop in GDP year over year, in contrast to last year’s 1% growth.
With lockdown measures across the United States and all across the world, in person, retail sales have suffered gravely. Retail sales fell 8.4% in March, with clothing and accessories suffering the worst plunging 50.5% in March. This is on the back of JCPenney and Neiman Marcus filing for Chapter 11 bankruptcy. Analysts forecast a further 12% drop in retail sales.