FYI | Aug 23 2007
By Chris Shaw
A major casualty in the recent market shakeout has been the New Zealand dollar, as from levels of around US80c a few weeks ago the currency is now trying to find a base at a level around US69-70c.
The sudden shift represents a change in sentiment for global investors, as with risk levels being reduced there has been a rush to get out of the carry trade in general and leveraged positions in the New Zealand dollar in particular.
According to Macquarie Equities this is good news for exporters as their output has suddenly become more competitively priced in global markets, but this will be offset to some extent by higher import costs and businesses suffering tighter credit conditions thanks to higher short-term interest rates.
The consumer is the lucky one as the broker sees little impact on households from the changes, particularly as the recent volatility has seen the long end of the yield curve fall, which implies less upward pressure on mortgage rates.
The broker does point to one scenario where the outcome is not as rosy though, this being for the recent movement in short-term rates to have a greater impact over the medium-term. The impact would come from the large number of foreign Kiwi-dollar denominated bonds due to mature in coming months, as to date strong demand for such instruments (known as Uridashi and Eurokiwi bonds) has helped keep mortgage rates in check.
If this demand falls away given the currency volatility it will then be more difficult for banks to obtain funds at current interest rate levels. This in turn would likely put upward pressure on mortgage rates, so squeezing household budgets and lowering domestic consumption.
One thing in New Zealand’s favour is the recent volatility has not changed the fact its high domestic interest rates mean the carry trade is still attractive for investors, the broker also pointing out most of these bonds are held more as long-term investments rather than as trading instruments.
There is also risk the broader economy slows in response to a slowing in global growth, but here the broker sees less risk as it regards the Kiwi economy as well placed to deal with any global slowdown given a still tight labour market and strong house price and retail sales growth.
Additionally, export performance looks to be fairly well insulated given supply constraints in key products such as dairy, while the government could look at measures such as cuts in interest rates if the economy needed an additional kick along.
As a result the broker’s view is the Reserve Bank of New Zealand (RBNZ) is unlikely to follow the US Federal Reserve in easing monetary conditions, as any such move is likely to reflect an easing in inflationary pressures rather than a tightening in credit conditions such as is currently the case.
