RBNZ likely to spark NZD selling
Movements in financial markets went against the usual patterns last week – AUD, GBP, NZD up but so too the JPY, all happening while share and oil prices declined. Significantly another wave of Chinese share market weakness failed to spark wider large-scale selling.
There are many questions about sustainability of current share prices (and an upward trend) but global economic news keeps showing up evidence of improvement. Locally the signs of improvement for August include NZ housing activity again up judging by Barfoot’s Auckland sales, likewise dairy prices, while retail sales failed to kick ahead but are improved on first half 2009 judging by Paymark electronic transactions.
Policy makers are taking a cautious approach to the global green shoots, generally adopting a no-tightening-soon approach. Significantly the RBA passed up the opportunity last week to warn of tightening ahead, although their comments were non-committal. Over the weekend, the G20 said “fiscal and monetary policy would stay expansionary as long as needed to ensure recovery”. The danger with this approach is that it sets up a greater knee-jerk reaction some months ahead – the eventual tightening will remain a market focus.
In the meantime, the Reserve Bank of New Zealand are likely to take this offshore lead by central banks and, consistent with their own earlier comments, play down the likelihood of near-term interest rate hikes when presenting the Monetary Policy Statement Thursday 9am. They may even go so far as to drop the cash rate by 0.25% to 2.25% p.a.
These present mixed forces for currency markets: the delay to the inevitable global tightening and the current growth momentum imply a rising NZD; the prospect of a dovish RBNZ and current nervousness about global share prices imply ample downside risks as well. A prudent approach would be to put more weight on the RBNZ this week and sell NZD ahead of Thursday.
