Forex Analysis: Are NZ Rates too High?

The NZDUSD is approaching the June lows of 0.7445.  Giving it a push is the Australian Dollar which also is under some pressure over the last few days after testing the upper regions of its trading range and failing once again. 

The two currencies have the highest short term rates of the G10 countries as they have benefitted from demand from China and that region of the world (the growing side). However, the two have also started to see economic weakness start to creep in - especially in New Zealand.  Australia still is experiencing growth from its export market.

Nevertheless, in Australia they have seen three weak releases this week when Job Advertisements, Construction PMI and the NAB Business Confidence all pointed to slowing.  The all important employment report will be released on Wednesday evening in New York. A rebound of 10,000 job gains is expected after last months surprise decline of minus 19,700 jobs lost. 

In NZ, the Business Opinion Survey (see chart below) came out last night unchanged from last quarter at -64, the lowest reading of that index in 33 years.  Companies were bearish on sales and profits.  They also indicated they are less likely to invest in their busines and more likely to fire workers in the next three months.  Finally, they largely expect that costs will increase and that will likely raise prices.  

All of which does not bode well for the consumer who has a declining stock market, weak housing and slowing global growth.  More unemployment and less pocket money should make the prospects of a recession in NZ (at least) the most likely outcome going forward (NZ has already shown a decline of 0.3% of GDP in the first quarter). 

The high interest rates in the countries with NZ at 8.25% and Australia at 7.25% seem to be too restrictive even in a global economy where inflation is a concern.  The risk, especially in NZ, is that the economy slips further in decline, especially if the central bank is influenced by a global inflation problem (caused by oil) which is largely out of their control.  

In NZ the Business PMI is scheduled to be released on the 9th. In addition the Real Estate Institute is expected to announce the Year on Year % change in home sales for June sometime between the 9th and 13th of July.  In May the sales fell by 53% versus last year. HMMMMM. 

The Business PMI came in at 49.3 last month, the second reading below 50 in the last 3 months.  The market will be watching tomorrow’s figure with great interest.

Although inflation is going to remain high, the central bank should start to see through the global problem of inflation and recognize that at 8.25% the rates are overly restrictive.  The central bank meets on July 23rd.   By then, more knowledge of the estimates for 2nd quarter GDP growth will be known.  No rate change is expected.  However, it will be curious to see what the central bank feels at the time given the distinct possibility of being the first country of the G10 to enter into a recession while having the highest rates at the same time?