RBNZ's projection for flat kiwi dollar TWI over next 3 years is unrealistic, traders say
The Reserve Bank's latest New Zealand dollar projection has the currency flatlining for three years, a position that traders say is unrealistic given the changing forces in global financial markets.
The bank revised its forecasts in the monetary policy statement and now sees the trade-weighted index (TWI) holding at an average 73.5 from the fourth quarter of this year through until the end of its forecast period in the December quarter of 2020. It had previously seen the TWI at 77.9 in the current quarter and 76.8 in December 2019. The TWI rose to 73.80, from 73.52 immediately before the statement was released.
Ross Weston, a senior trader at Kiwibank, said it was unrealistic for the TWI to flatline for the next three years. "They just have no idea what it should be with so many unknowns," he said. He noted that at the same time, the central bank has raised its short-term inflation forecasts. They also brought forward the timing of any rate hike by three months to June 2019.
"I guess if they had lowered it (the TWI) further they would have had to show more official cash rate increases," he said.
The Reserve Bank lifted its forecast for inflation for the next two quarters, predicting annual consumer price index inflation of 1.8 percent in the December quarter and 1.5 percent in March 2018 quarter versus a prior forecast of 1.3 percent and 0.7 percent. Inflation now reaches 2.1 percent in June 2018 versus a prior forecast of March 2019.
Like central banks around the globe, the RBNZ has been grappling with a prolonged period of tepid inflation that has ensured interest rates have stayed low even amid signs of renewed economic growth. That's slowly changing, with the US Federal Reserve tipped to hike rates for a third time this year and even the European Central Bank talking of winding down its massive quantitative easing programme. The impact will be felt in currency markets, traders said today.
Martin Rudings, a senior foreign exchange dealer at OMF in Wellington, said his firm expects the kiwi to fall against the US dollar in the face of further Fed rate hikes while the RBNZ stands pat although there is room for it to gain against other currencies in the TWI basket. Regardless, "I can guarantee it won't be at that rate for the whole time," he said.
Reserve Bank acting governor Grant Spencer was much more sanguine about the New Zealand dollar in today's monetary policy review than in previous statements, saying it is now in the vicinity of fair value after falling 2.3 percent on a TWI basis since the new government was formed. The TWI is about 6 percent below the average level the bank had predicted for the September quarter in its last MPS in August.
"We are happy to see that take place. We think that the currency is now closer to a sustainable level than it was previously. We are happy with this level of the currency. We think it is in the vicinity of a sustainable exchange rate," Spencer said at a media conference that followed the release of the MPS.
The central bank has previously tried to jawbone the currency lower but today's statement said the exchange rate "has eased since the August statement and, if sustained, will increase tradables inflation and promote more balanced growth."
Spencer also hinted the bank is looking at winding back its loan-to-value restrictions, now the housing market is cooling. "We are certainly reviewing the restrictions and the criteria we'd adopt for their removal," and will discuss the LVRs at the financial stability review later this month, he said. The financial stability report is slated to take place Nov. 29.
New government policies, such as a restriction on foreign purchases of houses and extending the so-called bright line test and setting up the tax working group with a potential impact on the tax regime around housing, will keep demand curbed, in particular among investors. "We are projecting house price inflation to stay quite low," said Spencer.
He noted the RBNZ had always said the LVRs are temporary but "if we are looking to remove them that wouldn't be done in one hit,' he said.