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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