Tuesday, June 9, 2015

Aussie – Kiwi competition reaches a key level | Houses and dairy products keep Graeme Wheeler focussed

Later today (in the evening GMT) the Reserve Bank of New Zealand will make its monetary policy statement and core interest rate announcement. Upon this will depend the fate of the NZ dollar against its major counterparts, of which the Aussie dollar is one. There has long been competition between these two nations, and it has not always been confined to the rugby pitch. At the end of March of this year, our Kiwi friends watched with glee as their currency approached parity with the Aussie – but then promptly bounced off it (see chart above).

We have often remarked on the love affair that the Forex market has with round numbers, and you cannot get a more round number than one.

Houses and dairy products keep Graeme Wheeler focussed

Whether or not the New Zealand unit eventually achieves a higher value than its Australian counterpart will depend to a significant extent on the decision that is announced by the governor of the RBNZ, Graeme Wheeler, later today. Market commentators are evenly balanced about whether he will or will not reduce interest rates. On the one hand he is faced with the reality that the much vaunted macro-prudential policies (which placed restrictions on mortgages) that were put in place to counter the potential for a residential property bubble have not worked, and any reduction in rates will only make a bad situation worse in this regard, while on the other hand he must cope with softening economic conditions on the back of collapsing prices for milk products, the most important export for NZ, and falling inflation, both of which call for interest rate reductions.

The only apparent bright spot on the horizon is the recent upsurge in oil prices, which can be expected to harden inflation expectations. This, however, may be too little and too late to assist him and his colleagues on this occasion.

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