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Q2 CPI Preview: Stronger NZ Inflation Not Enough For RBNZ's Liking
Rising fuel prices will have helped the Reserve Bank of New Zealand (RBNZ) get a tad closer to its inflation target in the June quarter, however, with price pressures still muted, the bank's upcoming policy decision in August is going to be a toss up between financial stability risks and low inflation.
"Beyond petrol prices (and house price inflation), we continue to struggle to find much evidence of a broad-based lift in inflation pressures just yet," ASB economist Kim Mundy said in a note.
ASB are forecasting a 0.5% rise in the quarterly CPI, and an acceleration in headline inflation from 0.4% in the first quarter to 0.5% last quarter.
Westpac economists are also expecting the price level to rise 0.5% on a quarterly and annualized basis in the June quarter.
"A rebound in fuel prices and ongoing gains in the housing-related categories are expected to account for most of the quarterly increase," Westpac senior economist Michael Gordon said in a note. "Elsewhere, the picture looks similar to recent quarters, with muted pass-through from last year’s fall in the New Zealand dollar and no real sign of home-grown inflation pressures emerging outside of housing."
In contrast, the RBNZ forecast in June that headline inflation and the June-quarter CPI change would both be 0.6%, although the central bank had less data on food and other consumer prices when it produced its forecasts in the June Monetary Policy Statement (MPS).
Another factor the RBNZ hadn't anticipated was the strength of the New Zealand dollar in the June quarter. By the end of the quarter, the TWI was almost 5% higher than what the RBNZ had anticipated for the three-month period, and in fact the TWI only spent 10 days of the entire quarter trading below the level forecast by the RBNZ.
The strength of the New Zealand dollar is becoming a huge issue for the central bank, as it diminishes the chances of the bank reaching its 2% inflation target midpoint and hampers the outlook for the export sector.
If economists - and the RBNZ board - are correct in their prediction that inflation will come in below the RBNZ's 1-3% target range, it will be the seventh quarter in a row that the central bank has missed its inflation target, and will mark four and a half years since the 2% target midpoint has been achieved.
The subdued nature of inflation, coupled with a strong exchange rate, suggests the bank is likely to ease monetary policy settings further. The question now is, when?
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NZD traders heads up - Official Q2 Inflation data due first thing new week
If you are trading the NZD you'll have seen the sell off from Thursday that coincided with the announcement of the RBNZ that they would produce a (previously) unscheduled review of economic forecasts
If inflation comes in low the NZD will remain heavy as speculation of a rate cut on August 11 grows. If inflation surprises to the topside there should be a bounce for the NZD, but with an overhang of sellers after last week's fall the bounce may be short lived, giving opportunity again to short sellers.
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RBNZ new housing rules proposal - more detail
Earlier headlines are here: AUD and NZD slip a few points - RBNZ proposes housing limits to tighten
- More detail on the proposals:
- In a consultation paper proposing changes to
loan-to-value restrictions (LVRs) "to further mitigate risks to
financial stability arising from the current boom in house prices."
- "The
banking system is heavily exposed to the property market with
residential mortgages making up 55 percent of banking system assets.
Investor lending has been increasing rapidly and is a significant
contributing factor to the current market strength. The proposed
restrictions recognise the higher risks associated with such lending,"
Governor Graeme Wheeler said.
- Loans exempt from the restrictions, including loans to build new homes, would continue to be exempted.
via Interest NZNew LVR limit of 60% would be set for landlords across the country, essentially extending and lowering the current limit for Auckland investors of 70%
Banks agree, sell the NZD
NZD was trading 6% above the RBNZ's expectations, causing it concern and to move to support easing soon. In particular, the bank stated that "A decline in the exchange rate is needed."
This should add downward pressure for NZD, and we promote long AUDNZD positions and short NZDCAD. The risk-supportive element from expectations of fiscal easing in Japan could add upside for AUD as the markets are not pricing in as much easing from the RBA, instead waiting for Australia's inflation print at the end of the month.
RBNZ to hit a hattrick of rate cuts and NZDUSD to plummet says Goldman Sachs
Goldies with chapter and verse on the RBNZ
Goldman Sachs expect 3 rate cuts of 25bp apiece in Aug, Nov and Mar. Their reasoning;
"In a scheduled "Economic Update" published on Thursday, the RBNZ signalled a significant strengthening in its easing bias, and dovish shift across its views on domestic inflation and domestic/global growth. At the heart of many of these changes is renewed concern about the elevated NZD. In our view, these changes make clear that the RBNZ is positioning for a deeper easing cycle, notwithstanding ongoing risks to financial stability from rising house prices."
NZD/USD forecast for the week of July 25, 2016
The NZD/USD pair fell during the course the week, but there is a significant amount of support at the 0.70 level. There is an extension of that support all the way down to the 0.67 level. Having said that, we could fall but I don’t have much interest in shorting this market from a longer-term perspective. I feel that it will be short-term trades only. If we bounce, I would be more than likely to start buying this market as it should reach down to the 0.73 level above.
NZD/USD Technical Analysis: Intraday Bias Higher
Data from earlier today showed a drop in the New Zealand trade surplus.
The fall in exports underscores the weakness in the economy and only adds to the bets of a RBNZ rate cut in August.
NZD/USD largely ignored the disappointing trade data and extended gains its gains on Tuesday morning to trade at 0.7042, up 0.67%.
Upside is holding above the 0.70 handle but finds stiff resistance at the 50-DMA at 0.7014.
A break above will see the next major hurdle at 0.7078 (10-DMA).
Strong support is seen at 0.6955 (trendline), with weakness only on a break below.
Trade idea: Go long on a break above 0.7014 with a stop loss at 0.6985 and take profit at 0.7054/0.7075.
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Oz CPI Preview: Countdown Is on as Markets, RBA Await Inflation Data
The prolonged spell of low inflation which has struck most major economies over the last few years finally hit Australian shores in 2015 and has since continued to erode underlying price pressures, giving the central bank broader scope to ease monetary policy.
Wednesday's update on consumer-price inflation from the Australian Bureau of Statistics (ABS) will likely be the deciding factor for markets, and of course the Reserve Bank of Australia (RBA), of whether an August rate cut is a done deal.
ANZ economists are picking a 0.4% rise in the CPI for the June quarter, which would drag headline inflation down from 1.3% in the March quarter to 1.1% - the lowest since the June-1999 quarter.
The RBA is even less optimistic about headline inflation, having forecast price growth of just 1.0% year-on-year for the June quarter in the May Statement on Monetary Policy (SoMP).
Underlying inflation is also expected to remain worryingly weak. ANZ are picking an average 1.4% inflation rate across the two core measures in the June quarter, down from 1.5% previously. The RBA is slightly more optimistic on this measure, expecting 1.5% underlying inflation, however, this is still well below the RBA's targeted 2-3%.
"While a fairly muted set of inflation numbers, our forecasts are broadly in line with those presented by the RBA in the May SoMP," ANZ economist Jo Masters said in a note. "Outcomes in line with our expectations are unlikely to surprise the RBA, but are likely to be soft enough to keep an August rate cut on the table."
Moody's: NZ banking system stable
Reuters with the latest from Moody's:
New Zealand - QV house prices for July: +14.1% y/y (prior +13.5%)
NZ Quotable Value house price index, another rapid rise