FYI | May 15 2008
By Chris Shaw
Economic data continue to point to a rapid decline in the health of the New Zealand economy after retail sales data for March fell 1.2% against market expectations of a 0.4% fall, which follows on from recent weaker than expected employment numbers and shows how quickly the NZ economy has taken a turn for the worst.
Macquarie suggests the run of weak data means the market is now pricing in rate cuts, with traders giving a 35% chance of a rate cut as early as June and a 25-basis point cut being fully priced in by September. That is not seen as the end of the action by the Reserve Bank of New Zealand (RBNZ) as the broker notes on market numbers it is now a 50:50 chance there will be a second rate cut soon after.
TD Securities senior strategist Joshua Williamson also takes the view the RBNZ will have to act and sees a cut coming in October, though he cautions the risk is the central bank moves earlier as recent data show the economys deflating rapidly.
As the market is pricing in cuts already Macquarie suggests the RBNZ may take the view conditions are slowly easing, so making it easier for the bank to move from its currently restrictive level of policy to a more neutral one. Such a move spells further weakness for the Kiwi dollar, the broker seeing any moves as likely to push the currency lower.
Again TD Securities agrees, Williamson suggesting traders should be selling any rallies in the currency rather than buying the dips, which is in line with Danske Bank’s recommendation of being short the New Zealand dollar against the US dollar.
The bank estimates the market is pricing in as much as 125-basis points in rate cuts over the next 12 months and with the currency extremely overvalued on historical measures it sees trouble for the Kiwi dollar as monetary policy turns. The bank suggests there is scope for the NZ dollar to fall below US70c within the next six months, though it has a trade target of US74c having suggested selling the currency at US77.4c earlier this month.
