FYI | May 20 2008
By Chris Shaw
Market watchers have been waiting for the US economy to deliver data confirming negative GDP growth but according to TD Securities senior strategist Joshua Williamson there is a chance New Zealand may beat the yanks to the punch.
Williamson suggests the 1Q GDP figure, due out in late June, will confirm a weakening economy with the figure set to follow on from already weak recent data such as the largest fall in employment in 19 years and lower than expected wage growth.
Such weaker growth was to be expected in his view as a natural consequence of the restrictive monetary policy setting in place for the past several months, but the outcome is likely to spur a change in policy as the Reserve Bank of New Zealand (RBNZ) moves to a more dovish approach.
This sees TD Securities alter slightly its timetable for rate cuts, with September now seen as the most likely starting point compared to October previously, with risk this timetable shifts to July if upcoming data on the state of the economy show signs of further deterioration.
On Williamson’s numbers the RBNZ is likely to cut rates by 1.25% by the first quarter of 2009, bringing the cash rate back to 7.0%, with further cuts likely later in 2009 as the bank attempts to kick start the next growth cycle. This leads Williamson to suggest an eventual cash rate of 6.0% as this would be closer to a neutral level.
The revised outlook on rates brings TD Securities more into line with market expectations for the Kiwi dollar as well (See Quotes & Shorts, The Best Buy In The Aussie Market, And More…, FNArena, 19/5/08), with the cuts leading Williamson to forecast a weakening in the currency from around US$0.77 now to around US$0.75 by the end of the current quarter and to US$0.70 by the end of the year as the rate cuts flow through.
Further weakness to as low as US$0.66 in the first quarter of 2009 is seen as possible, so the group’s suggestion is to sell any rallies in the New Zealand dollar and to move to long Aussie/short Kiwi dollar positions as the cross rate is set to gain from a narrowing yield differential but a widening growth differential.
