The RBNZ announced that it was maintaining the OCR at 2.25%, sending the Kiwi higher across the board.
What’s up with that and where will the Kiwi go from here?
Does the RBNZ’s most recent statement and presser offer any clues? Well, find out by reading up on the key highlights of the June RBNZ statement and presser.
1. Views on the Kiwi dollar
Wheeler didn’t miss a beat and repeated his mantra that the Kiwi dollar “is higher than appropriate given New Zealand’s low export commodity prices.” Interestingly enough, he also said that the RBNZ expects Kiwi’s TWI (trade-weighted index) to depreciate over time. Hmm. How come? Oh, for the newbies out there, the TWI is, well, an index of the Kiwi’s performance against a basket of 17 currencies that are weighted based on their level of trade with New Zealand.
Getting back on topic, the details of the June Monetary Policy Statement shows that the RBNZ blames Kiwi’s recent strength mostly on the “the improvement in risk appetite in financial markets since the time of the March Statement,” which made the higher-yielding Kiwi more attractive.
However, the RBNZ assumes that the U.S. Fed would be hiking rates soon, which it hopes would increase demand for the Greenback while weakening demand for the Kiwi in the process. The RBNZ also hopes that “global economic conditions improve, allowing trading-partner growth to continue at around its average rate,” which would then create demand for those trading partners’ respective currencies that would hopefully ease demand for the Kiwi.
The RBNZ projects that the Kiwi’s TWI would drop to around 70.00 by the end of next year, which is a bit of tall order (but not impossible) because the TWI as of today (June 9, 2016) stands at 75.63, and the last time the Kiwi’s TWI dipped close to the RBNZ’s 70.00 target level was way back on October 5, 2015, when the TWI came in at 70.15, with the following exchange rates (selected currencies only):
- NZD/USD – 0.6451
- NZD/JPY – 77.42
- NZD/CAD – 0.8489
- AUD/NZD – 1.0928
- GBP/NZD – 2.3563
- EUR/NZD – 1.7397
2. Limited ability to intervene
Wheeler was asked about the persistently strong Kiwi, as well as his thoughts on the Kiwi’s surge when the RBNZ announced that it maintained its monetary policy, and what tools he had to address the Kiwi’s strength during the RBNZ press conference.
In reply, Wheeler first said that the trade turnover on the Kiwi is roughly around US$105 billion per day and that most of the trades occur offshore with NZD/USD in focus, which is why the RBNZ is hoping that the U.S. Fed would hike rates soon. He then said that a smaller central bank like the RBNZ has limited reserves, so its ability “to modify and change the tide in the exchange rate is always gonna be limited.”
Wheeler noted that the RBNZ has a so-called “traffic light” system for intervention, though, but the RBNZ will only use such a system when really absolutely necessary and only during times of limited liquidity when an intervention can be most effective.
As for using rate cuts to weaken the Kiwi by scaring away foreign investors, Wheeler stressed heavily that future rate cuts (if any) would be data-driven, but he also said that the RBNZ “won’t hesitate to adjust interest rates” in order to “try and move the exchange rate” if needed, so yes, the RBNZ can and will use rate cuts to weaken the Kiwi if needed.
3. 2017 inflation projection upgraded
The RBNZ expects “inflation to strengthen reflecting the accommodative stance of monetary policy, increases in fuel and other commodity prices, an expected depreciation in the New Zealand dollar and some increase in capacity pressures.” Specifically, the RBNZ expects CPI to rise by 1.5% year-on-year by Q1 2017, which is a bit faster than the previously projected rise of 1.3%.
Higher inflation expectations mean that the RBNZ will be less likely to cut further. But do note that one of the RBNZ’s assumptions for its upgraded projection is “an expected depreciation in the New Zealand dollar,” and I already talked about what the RBNZ’s assumptions are for a drop in the Kiwi dollar to take place.
4. Housing market concerns
In his previous statement, Wheeler said that
“There are some indications that house price inflation in Auckland may be picking up. House prices remain at very high levels and additional housing supply is needed.”
But in his recent statement, he sounded more skittish about the housing market, saying that:
“House price inflation in Auckland and other regions is adding to financial stability concerns. Auckland house prices in particular are at very high levels, and additional housing supply is needed.”
Okay, but what does the housing market have to do with monetary policy you, ask? Well, cutting rates further would make borrowing money cheaper, which may encourage even more housing demand because, as Wheeler puts it, “there’s a perspective among New Zealanders that house prices will always go up.” To add to that, housing loans in New Zealand, especially in Auckland, are highly leveraged, which increases the risk of a housing bubble, so the RBNZ is likely wary of cutting rates further.
5. One more rate cut (maybe)
Wheeler said in his press statement that “further policy easing may be required to ensure that future average inflation settles near the middle of the target range.” And when he was asked to clarify that, he said that there’s “one further cut that’s built into” the RBNZ’s interest rate projections, but he said that could change depending on these factors:
- New Zealand’s overall economic performance
- The Kiwi’s exchange rate
- Inflation expectations
If those factors improve, then it’s possible that we won’t get another rate cut, but if those factors deteriorate, then Wheeler said that we can expect a rate cut, maybe even more if things get really bad.
Overall, the RBNZ is still a bit dovish and is even open to further rate cuts if needed. The RBNZ was also concerned with the Kiwi’s recent strength. Still, the fact that the RBNZ refrained from cutting rates probably convinced forex traders who were betting on a rate cut to abandon ship.
Not only that, the RBNZ’s jitters over the housing market likely enticed traders who were on the sidelines to buy up the Kiwi on lower rate cut expectations, since cutting rates further would only worsen the housing market issue.
The Kiwi then got another bullish boost during the RBNZ press conference, likely because Wheeler admitted that an intervention is unlikely and probably won’t be very effective, which is a good go-signal as any for the Kiwi bulls to load up some more.
Do note, however, that the RBNZ is actually expecting the Kiwi to depreciate over time, and a weaker Kiwi is one of the factors for its upgraded inflation expectations, as I already talked about earlier.