Monday, December 14, 2015

Bankers worry in New Zealand | … and Texas

The Reserve Bank of New Zealand, the country’s central bank, has published an article entitled ‘An updated assessment of dairy sector vulnerabilities’.

The article investigates the severity of cash flow pressures currently facing dairy farmers in NZ, and assesses the potential financial stability implications if the payout (for which read prices for Dry Powdered Milk) remains low for an extended period. The article estimates that around half of dairy farmers are now facing a second consecutive season of cash losses, placing the sector under considerable financial pressure. The authors find that the majority of farms would remain viable in a sustained low payout environment, although some highly-indebted farms would face considerable difficulties. Losses for the banking system are estimated to be manageable even under a severe stress scenario.

All of this is of very high importance for the central bank in its assessment of whether or not it should raise interest rates. It would like to do this to head off a property bubble in the cities, most noticeably Auckland, but will not want to further increase the hardship for its many dairy farmers.

Meanwhile, losses for the Kiwi (NZDUSD) seem to have stabilised, with the pair seeing a rising wedge pattern on the weekly chart that extends back to the middle of the third quarter of 2015.

Bankers are also worried in Texas

This time it is not the US central bank, the Federal Reserve, that is raising the alarm, but rather Wells Fargo bank, the largest US commercial bank by market capitalisation, according to the Financial Times. It has announced that many of its clients in the energy sector, most notably in Texas, are facing significant problems because of the low price of oil.

This situation is not likely to be improved any time soon as Saudi Arabia, in particular, is known to be willing to pump oil for as long as it takes to increase such pressure, and this announcement must be telling the Saudis that their cunning plan is working, at least to some extent.

The low price of oil will also be on the minds of the members of the FOMC as they meet today and tomorrow. It is not likely to make any difference to the expected increase in US core rates tomorrow, but it could and probably will impact greatly on the speed and size of future rate rises.

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