Let’s pretend like you don’t care at all about the kiwi and thus have no idea what the New Zealand central bank did on Wednesday. Now, have a look at the following chart and try to surmise the reason for the sudden spike:
You’d certainly be forgiven for thinking that the RBNZ hiked rates. That’s a pretty good pop in the kiwi. Only they didn’t hike rates. They cut rates by 25 basis points and as Barclays notes, were “unambiguously dovish [as] the statement explicitly noted that further policy easing will be required and that a decline in the exchange rate is needed’ given downside risks to inflation emerging from a strong NZD.”
And here’s Goldman’s quick take:
“Key signals in today's statement amounted to a material dovish shift from the prior MPS in June, but only a modest shift in tone from the brief "Economic update" released on 21 July. Overall, while cognizant that it has limited impact on both the NZD and tradables inflation, the RBNZ has signalled a renewed intent to cut rates to alleviate upside pressure on the currency, and downside pressure on tradables inflation and broader inflation expectations.”
This might seem relatively unimportant to US traders, but it’s actually quite notable. Why? Because the spike higher in NZDUSD following the announcement is the latest example of the market flatly rejecting the notion that monetary policy has any more to give. We’ve seen this time and again with Japan. Recall the yen after the BoJ announced negative rates:
And look at what the yen has done since the BoJ expanded its ETF purchase program:
And let’s not forget what the AUD did last week after the Australian central bank cut rates:
Same dynamic. This is how we described it last Tuesday:
“Let’s just call this what it is: the market simply doesn’t believe in this game anymore. It’s not working and so investors figure the best bet is just to do the exact opposite of whatever central bankers are trying to convey. “
Here’s what JPMorgan’s John Normand told Bloomberg after the RBNZ decision: "Unless the central bank gives some indication that the easing cycle could be extended or protracted over many months, markets tend to trade the end-of-cycle phenomenon. There’s no more downside to interest rates after this last cut and therefore the currency bounces."
And here’s Bloomberg from earlier today: “RBNZ cut rates 25bps but the NZD surged as much as 1.9%, putting the central bank on the defensive. Assistant Governor McDermott said the currency’s reaction was overdone and markets missed the downside risks to the rate outlook. It doesn’t help that the 2.00% rate is the highest in G-10.”
Well the assistant governor is wrong. The market didn’t “miss” anything. The market knows exactly what’s going on here. Like Sweden, New Zealand is grappling with an overheating housing market and the lower rates go, the larger that bubble gets. But in order to compete in today’s global currency wars, you basically need to operate at the zero lower bound or risk a soaring currency and subdued inflation.
(Chart: Goldman)
In short, there’s very little New Zealand can do. They’re outgunned. This is how RBNZ governor Graeme Wheeler summed it up on Wednesday:
“You have to think what life is like in an economy that’s likely to grow at 3.5 percent if you suddenly race to the bottom with interest rates. If we drop interest rates rapidly to around zero like much of the rest of the world, we’ll have an economy that’s totally overheating. Just think what the housing market would be doing.”
Indeed.
We’re on the precipice folks. We’ve reached the limit.
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