FX Flash
Group Economics Macro & Financial Markets Research
19 July 2016
More downside bias in AUD and NZD Roy Teo Senior FX Strategist Tel: +65 6597 8616 roy.teo@sg.abnamro.com
RBNZ consults new macro prudential tools to cool housing market… …paving the way for a rate cut in August Relief recoveryChange in the AUD over? in labor force 000 3mth avg (lhs)
RBNZ consults new macro prudential tools to cool housing market… Earlier today, the Reserve Bank of New Zealand (RBNZ) released a consultation paper proposing changes to loan to value (LVR) restrictions to further mitigate risks to financial stability due to rising house prices. This is because residential mortgages contribute 55% of banking system assets. Proposed new restrictions include: 1) No more than 5% of bank lending to residential property investors across New Zealand would be permitted with an LVR of greater than 60%. 2) No more than 10% of lending to owner occupiers across New Zealand would be permitted with an LVR of greater than 80%. 3) Loans that are exempt from the existing LVR restrictions including loans to construct new dwellings would continue to be exempt. Consultations concludes on 10 August and these proposed new restrictions would take effect on 1 September 2016. …paving the way for a rate cut in August The New Zealand dollar (NZD) was sold off aggressively this morning by a cent to 0.7020 after the RBNZ decided to implement macro prudential tools to cool the housing market earlier than expected. Earlier this month, the RBNZ said that such measures will only be implemented by the end of this year. We suspect that the strong NZD and stronger than expected house price gains are the main catalysts for implementing such measures sooner than later. Since 12 July, the NZD trade weighted index (TWI) has declined by more than 3% as market bets that the RBNZ will cut the Official Cash Rate (OCR) by 25bp next month increase. We expect the RBNZ to cut the OCR by 25bp in August. This is about 80% priced in by financial markets. A weaker NZD towards crucial support around 0.6965 is likely this week. Current levels in the NZD TWI remains about 6% stronger than the RBNZ’s forecast for the end of this year. Hence the RBNZ is likely to remain dovish on the exchange rate. The RBNZ is scheduled to publish a brief economic assessment on 21 July.
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FX Flash - More downside bias in AUD and NZD - 19 July 2016
NZD stronger than RBNZ’s forecast
Australia Q2 CPI likely to remain below 2%
Index level
%
4.0
85
3.5
80
3.0 75
2.5
70
2.0 1.5
65 60 Jan-10
1.0 Apr-11
Jul-12
NZD TWI (lhs) Source: RBNZ
Oct-13
Jan-15
Apr-16
0.5 Jan-10
RBNZ forecast
Apr-11
Jul-12
Inflation gauge YoY% (rhs)
Oct-13
Jan-15
Apr-16
CPI trimmed mean YoY%
Source: ABS, Melbourne Institute of Applied Economic and Social Research
Relief recovery in the AUD over? The Reserve Bank of Australia (RBA) minutes released this morning did not have a clear monetary policy bias. The RBA’s preference is to adopt a wait and see approach as further information on inflationary pressures, the labour market and housing market would drive the direction in monetary policy. We expect core inflation in the second quarter to remain below 2%. Wage growth is also expected to remain subdued. Housing credit growth has eased and housing auction clearing rates have stabilised. In conclusion, we expect the RBA to cut the OCR by 25bp to 1.5% in the next monetary policy meeting on 2 August. This is about 60% priced in by financial markets. Since the last monetary policy meeting on 7 June, the AUD TWI has strengthened by almost 3%. The strength in the AUD if sustained is likely to push tradable inflation into negative territory. The technical outlook for the AUD has deteriorated in recent days. The AUD has failed to close above 0.7650 on four attempts since 24 June. This is a potential signal that the relief recovery which started at the end of May is probably over. We expect the AUD to head lower towards 0.72 in the coming months.
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FX Flash - More downside bias in AUD and NZD - 19 July 2016
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FX Flash - More downside bias in AUD and NZD - 19 July 2016