Monday, March 3, 2014

Aussie Central Bank wants a lower Aussie dollar | Important New Zealand economic indicator is at its best in 40 years.

Aussie Central Bank wants a lower Aussie dollar

Our assessment has been for some time that there is an appetite in official circles in Australia for a weaker Aussie dollar. Very early this morning, in GMT terms, the Reserve Bank of Australia (RBA) released its monetary policy statement. Although we had temporarily exited our Aussie dollar positions in anticipation of extreme bi-directional volatility, which often takes place on occasions like this, we will be looking to restore them on the short side as soon as the dust settles.

And the RBA statement did not disappoint - The Central Bank reiterated its desire for a lower Aussie. This from Dow Jones Newswire this morning:

DJ Australian Dollar Falls as RBA Restarts Jawboning -- Market Talk

0424 GMT [Dow Jones] AUD/USD fell from 0.8944 to 0.8920 after the Reserve Bank of Australia said 'the exchange rate remains high by historical standards.' In its Feb. 4 statement the RBA merely noted that 'the exchange rate has declined further, which, if sustained, will assist in achieving balanced growth in the economy.' AUD/USD rose as high as 0.9082 last month from 0.8755 before the Feb. 4 statement. 

While today's statement reiterated that 'the most prudent course is likely to be a period of stability in interest rates', the reference to the exchange rate as 'high by historical standards' will reinforce the view that upside potential is limited by the prospect of increasing RBA jawboning. The RBA notes that 'wages growth has declined noticeably' and that 'if domestic costs remain contained, some moderation in the growth of prices for non-traded goods could be expected over time, which should keep inflation consistent with the target, even with lower levels of the exchange rate.' By downplaying inflation risks, the RBA is leaving the door open for lower interest rates if required. ( 
Contact us in Singapore. 65 64154 140; 
(END) Dow Jones Newswires 
March 03, 2014 23:24 ET (04:24 GMT) “

New Zealand terms of trade are at their best in 40 years.

We have been watching the New Zealand dollar for a little while, particularly as it fares against the Australian dollar. See “The Kiwi ‘Rock Star’” here. Our analysis indicated that it was worth watching and the report from Statistics New Zealand, the responsible government agency, on Overseas Trade Indexes for the Dec 2013 quarter, published yesterday, gives further impetus to that belief.

The full report can be read here, at the Statistics New Zealand website, but the following will give a flavour:

The merchandise terms of trade rose 2.3 percent. This is the fourth consecutive rise in the terms of trade, which is at its highest level since the December 1973 quarter and 3.5 percent below the all-time peak in the June 1973 quarter. In the December 2013 quarter, the Reserve Bank's trade weighted index rose 2.7 percent, which had a downward effect on export and import prices.

Terms of trade is a measure of the purchasing power of New Zealand’s exports abroad. An increase means New Zealand can buy more imports for the same amount of exports”.

1973 is, for so many people, a lifetime ago. This report means that the NZ terms of trade are at their best for over 40 years. At the same time they are reporting that they exported twice as much dairy produce to China as they did to their near neighbour, Australia. This type of information, and other economic data, suggests that interest rates in New Zealand could rise as early as this month.

We intend to continue to watch the Kiwi. We currently have a short position in the Aussie against the New Zealand dollar, the AUDNZD pair, and also in the Aussie against the US dollar (AUDUSD). But see above for how we handle expected severe bi-directional volatility on the occasion of such events as RBA policy announcements.

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