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FX Update – NZ targets property investors

Written by Ian Dobbs on May 19th, 2015.      0 comments

Market Overview:
The New Zealand government this week joined the Reserve Bank in a war on Auckland property prices. The new measures resemble more of a skirmish than a full on attack however, and they are a little late to the party. The time to act was years ago when it was clear to everyone except the government, that investors, both onshore and offshore, where having a major impact on prices. In the US the majority of economic data continues to disappoint with little in the way of a recovery from the poor first quarter evident just yet. Very tame consumer sentiment and retail sales data will add to other indicators that suggest the Fed will be on hold for the next few months.

The Reserve Bank of Australia’s Deputy Governor Lowe delivered a speech yesterday that highlighted the balancing act the bank is performing in order to get policy settings just right. The bank would certainly like to see the currency lower and cutting interest rates would help to achieve this, as well as provide a boost to consumer demand and home construction. But having interest rates too low is not in the long term interest of Australia as it could help create a debt fuelled consumption boom. This is of particular concern as debt levels are already high and the prospects for future income growth are somewhat subdued. We get the minutes from the last RBA meeting this afternoon and it will be interesting to try and gauge just how much of an easing bias the bank maintains. Later in the week to draw focus we have consumer sentiment and inflation expectations data.

New Zealand
Last week saw some very strong retail sales data from New Zealand which will have reduced the chances of a near term rate cut from the Reserve Bank. Over the weekend however the chances of a rate cut increased just a bit after the government announced it will tax property investors who purchase and then sell investment properties within a two year time period. These new rules come into effect on the 1st of October, exactly the same day as the RBNZ’s new minimum deposit ratios for investors. This two pronged approach may well have an impact on the Auckland market and anything that serves to cool price gains, will increase the chances of an interest rate cut over the coming months. I still feel June is just a little too early for such a cut, as RBNZ will want time to assess how the Auckland real estate market reacts before deciding whether or not to adjust interest rates. This afternoon we have inflation expectations data out that will be closely watched. This will be followed by Fonterra’s latest dairy auction and the government's annual budget release.

United States
Economic data from the United States continues to raise some worrying questions about the underlying state of the economy. Apart from employment indicators, most other data releases have been coming in on the soft side. This is helping to push out rate hike expectations and therefore undermine support for the USD. The latest key release to disappoint was Friday’s University of Michigan consumer sentiment. The prior reading was 95.9 and the market was expecting only a small decline to 95.8, but the actual result came in at 88.6. That’s the lowest reading since October 2014 and the biggest month on month drop since December 2012. This comes on top of last week’s poor retail sales number and it really suggests that the US consumer, traditionally the powerhouse of the US economy, is being extremely cautious. Last night we saw comments from the Fed’s Evans who said he’s in no hurry to tighten monetary policy. He added he doesn’t expect a pothole for growth like that in the first quarter, and that he’s still optimistic for 2.5% - 3.0% growth in the second half of the year. Still to come this week we have building permits, the FOMC meeting minutes, the Philly Fed manufacturing index, and inflation data.

United Kingdom
The UK Pound continues to be a strong performer buoyed by supportive economic data and the market friendly election outcome. The latest piece of positive data came in the form of construction output which jumped +3.9% from a prior reading of -0.3%. This came on top of positive readings earlier last week from manufacturing and industrial production as well as average cash earnings. Tonight we have inflation data to draw focus and the market is expecting a reading of flat. The Bank of England has warned that inflation may even turn negative at some stage over the coming months. If we do get a negative reading it will be the first time since March 1960. Tomorrow we get minutes from the Bank of England rate meeting and then later in the week we get the latest reading of retail sales. Governor Carney is also due to speak on Friday evening.

There has been little data of significance from Europe since last Wednesday’s GDP result. That figure came in at +0.4% which was a small improvement over the previous reading of 0.3%. Since then Greece has remained in the headlines, although we did hear from ECB President Draghi who said the current “monetary policy stimulus (quantitative easing) will stay in place as long as needed for its objective to be fully achieved on a truly sustained basis”. In terms of Greece, the negotiations continue with recent hints that the two sides might be coming closer together, although progress is painfully slow. Greece has said that four red lines remain in talks with lenders. These are pension cuts, a growth plan, the primary surplus target, and debt restructuring. Time is running out however, with Greece only able to cover its obligations for a few weeks at best. Still to come this week we have manufacturing and service PMI data along with German ZEW economic sentiment and IFO business climate index.

Recent data out of Japan has been mixed at best. Consumer confidence released late last week took a small fall and came in below expectations. Core machinery orders released yesterday was much stronger than forecast printing at +2.9% versus expectation of +1.7%. This was countered however by negative revisions to industrial production data and softer than forecast reading from tertiary industry activity. The Bank of Japan’s (BOJ) chief economist has been on the wires saying he expects the Japanese economy to move to an expansionary phase from the recovery phase later this year. He added they need to be mindful of potential problems in the Greek and Chinese economies. Over the coming days we have GDP data to digest along with the BOJ monetary policy statement.

Canadian manufacturing sales data released late last week provided a sign that the economy may well be recovering from the poor first quarter. Manufacturing sales increased 2.9% which was much stronger than the forecast of just 1.0%. The prior reading was -2.2%. The economy still has a long way to go in recovering from the oil shock although Moody’s Investor Service predicts growth of between 1.5% and 2.0% this year. We will hear from Bank of Canada Governor Poloz tonight then later in the week we get wholesale sales, retail sales, and inflation data.

Major Announcements last week:
  • RBNZ introduces lending restrictions on property speculators
  • UK Claimant Count Change -12.6k vs -20.5k expected
  • UK Average Cash Earnings +1.9% vs +1.7% expected
  • US Retail Sales 0.0% vs 0.3% expected
  • US Producer Prices -0.4% vs +0.1% expected
  • US Unemployment Claims 264k vs 272k expected
  • Canadian Manufacturing Sales +2.9% vs +1.2% expected
US UoM Consumer Sentiment 88.6 vs 95.8 expected