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RBNZ: Walking a tight-rope – Rabobank

Discussion in 'Fundamental Analysis' started by FXStreet_Team, Mar 9, 2016.

  1. FXStreet_Team

    FXStreet_Team Well-Known Member Trader

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    Jane Foley, Research Analyst at Rabobank, notes that the Auckland house price inflation appears to have come of the boil.

    Key Quotes

    “While the central bank may be relieved that house price growth is no longer accelerating, there is little room for celebration since historically strong house price inflation In Auckland has rippled out to the surrounding regions. The strength of house price inflation is a key factor behind market expectations for steady rates from the RBNZ at tonight’s policy meeting. That said there are plenty of reasons for the central bank to present a dovish tone this evening and to lower rates again later in the year.

    In it policy statement in January, RBNZ Wheeler referred to increasing uncertainty about the global economy due to concerns about China and other emerging markets. Although Wheeler acknowledged a softening in the domestic economy during the first half of 2015, he was optimistic about prospects in 2016 on the back of strong net immigration, construction activity and a lift in business and consumer confidence indices. Arguably, however, his confidence about the domestic economic is likely to have faltered in recent weeks.

    A week or so ahead of the of the RBNZ’s January policy meeting the CEO of Fonterra had told Bloomberg news that it would maintain its NZD4.60 per kg of milk solids forecast pay-out for the current season. This was lowered to NZD4.15 per kg on January 28 and yesterday it was announced that the pay-out for the current season had been cut again to NZD3.90 per kg.

    Although the overall income for many of NZ’s farmers will be supported by dividend payments from Fonterra, the outlook has become bleak – DairyNZ estimates that farmers need a price of NZD5.25 per kg to break even. Finance Minister English yesterday came to the inevitable conclusion yesterday that farm land prices are likely to drop on the back of soft dairy prices and stated last week that NZ no longer has the international dairy market to itself.

    The weakness in dairy prices will be a contribution factor to the New Zealand’s soft inflation rate. In the 3 mths ending December CPI inflation declined -0.5% q/q mostly on the back of local petrol prices and cheaper fresh food. The headline CPI inflation rate was dragged down to just 0.1% y/y well below the central bank’s 1% to 3% inflation target.

    Not all New Zealand economic data releases are so weak. Yesterday’s release of retail spending on cards showed a much stronger than expected 0.7% m/m rose in February and net migration in January posted a strong 6130, maintaining the upward trend. However, business confidence data has started to slip and this leaves the door open for further easing from the RBNZ later in the year.

    Measured on a 12 mth view, the NZD is the worst performing G10 currency having dropped almost 8% vs the USD. However, as the USD weakened in the latter part of last year. USD/NZD edged higher and since then the currency pair has remained in a broad range. The RBNZ habitually attempt to talk the value of the NZD lower.

    In the January policy statement Wheeler repeated that “a further depreciation in the exchange rate is appropriate given the ongoing weakness in export prices”. In view of the lack of price pressure in the economy and since the NZD is still overvalued on several measures, we expect a dovish policy statement from the RBNZ this evening and look for a softer tone in NZD/USD to re-emerge in the coming weeks. We forecast a move towards 0.61 on a 12 mth view.”
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