Back to the old ways
There is a growing sense that the worst of the global recession is over. There is also further evidence that conditions are improving in New Zealand. Meanwhile there are not many events due in the next couple of weeks to rattle confidence in the recovery scenario. This is a backdrop that would normally favour a higher NZ dollar, just like the old days.
The problem is that a return to the old days seems inconceivable; surely people and policy-makers will change their ways? Well, that is yet to be determined. Currently we can point to high levels of global liquidity. We can point to speculative activity in global assets markets. And we can point to central banks reluctant to act, for fear of derailing the recovery (or our central bank threatening “the OCR could still move modestly lower“). All reminiscent of 2003.
Eventually, though, there will be fiscal and monetary tightening. It is unlikely that any exit strategy will occur smoothly. Thus there is plenty of volatility ahead. It is tempting to anticipate this policy response by selling NZ dollars now but the NZ dollar is likely to move higher in the near-term.
Background articles …
1) Growth rates have proven to be generally better than feared in the June quarter (NZ and Australia yet to be reported) with growth in Germany and France amongst Europe, and generally in Asia. But overall output did decline in the Eurozone, as was the case in the US. Both paled besides Russia. These data, plus more recent figures pointing to improvement, have prompted economists to increase growth predictions (WSJ) for second half 2009. It appears the worst is behind us.
2) There has been more confirmation of a local recovery also: confidence up in the general monthly BNZ survey; pockets of regional job recovery reported by Hays Specialist Recruitment; greater confidence about housing in the quarterly ASB survey; and, more forward-looking, Infometrics forecast the fast-population, slow-construction mismatch to show as 11% higher house prices over 12 months.
3) In the US corporate world, 91% of US S&P 500 companies have reported June quarter results and the pattern is clear: US profits are still rising faster than expected for most but sales are still falling – down 5% in the quarter – and meanwhile corporates are sitting on near-record levels of cash; the market has re-rated share prices but not near-term earnings, thus pushing the P/E on prospective 12-months operating earnings higher but at 14.4 it remains below the 18-year average of 18.4. The implication: there is potential for further sharp share price rises IF sales growth were to emerge.
4) Here is where policy becomes relevant. At present the central banks are adopting a stimulative stance, such as the Fed maintaining “exceptionally low levels of the federal funds rate for an extended period“. But eventually they will have to unwind the huge monetary stimulus in place. When? Some point to 1937 and suggest the central bank response will be slow and gradual. But there is also the lesson of the too-slow US tightening of 2003-2004 to keep in mind.
5) Meanwhile signs of the old excesses are already emerging; on Wall Street; and in the local housing market with banks again offering high LVR loans and real estate agents talking of missing out.
