© Greg Gibbs
|
We would presume, if the Central banks cut once, they generally cut twice at a minimum. Thus, I believe that the market is strongly anticipating another rate cut this year. Last month's data, including the GDP figure for Q1, has been softer than expected, while the milk prices are continuing to fall.
Hence, putting all data together, it looks like there is a strong possibility of another round of measure from the RBNZ side, which is likely to be delivered as soon as July, possibly in September. There is a good chance that the Central Bank has to go even further in terms of rate cuts, perhaps in this or early next year. However, that will depend to a large extent on the performance of the major currencies.
The latest OECD report highlighted the aggravating housing problem in New Zealand, Auckland prices in particular, "which are a constraint on economic growth and a significant financial vulnerability". Moreover, Labour's finance spokesman Grant Robertson added that, with high levels of private debt from overvalued housing and highly-leveraged dairy farms, a commodity price or interest rate shock could see cracks in the economy widen. Do you consider this statement controversial and why?
This is one of the statements which highlight the outside risks rather than the core risks. I guess the job of the opposition spokesman is to put some pressure on the government, whilst tending to exaggerate the outlook for the country's economy. However, levels of debt in New Zealand are high, and that has been recognized as an issue by policy makers for a number of years, which is in fact a core concern. Household debt levels to income are over 150%, since more people buy to invest in real estate, which creates risks for the economy – should the housing prices fall or the economy would slide down because of an outside shock.
The risk is still there, but at the same time, the RBNZ is still relatively cautious about whom they are lending money to. Importantly, there is no subprime lending that could generate a crisis like it happened in the US. The levels of immigration are high, prompting housing shortage and overbuilding, thus, there are numbers of reasons why real estate prices are extended in New Zealand. Therefore, I believe the situation is not as critical, as perhaps the mentioned statement suggested.
The New Zealand Dollar is headed for its monthly close below the 0.70-mark against the US dollar in five years. Do you consider this rate cut response a near-term effect or will the Kiwi continue to drop after the year end? What will be other major drivers for the Kiwi in 2015?
We assume the Kiwi can fall further, which will obviously depend on direction of the US Dollar and the US interest rates as well. However, it likely would seem that interest rates should narrow further, slightly falling in New Zealand and rising in the US. The outlook for the commodity prices is also quite significant. We have seen pretty weak prices for commodities in New Zealand in recent months, particularly for milk, which continue to fall, but probably would stabilize at some point.
However, if diary prices remain at such low level, it will most probably have an ongoing effect on the economic debt. Perhaps after another year we will also see a little bit more peaking in the construction cycle. Hence, we would presume that there is a strong risk for the currency to fall further, even though it has fallen significantly in the last 12 months. Nevertheless, historically the New Zealand Dollar is a relatively strong currency.
What are your forecasts for NZD/USD and AUD/USD in 2015?
Our forecast for the NZD/USD stands at 0.59 levels in 12 months and for the AUD/USD, we see the pair trading at 0.65 in the same period.