On 10 September the monetary policy statement announced a 25 basis point reduction in the overnight cash rate. This was the third consecutive reduction. At the 29 April meeting, the tone was cautious. Although the OCR remained unchanged at 3.50%, RBNZ Governor Graeme Wheeler notedi that “...The bank expects to keep monetary policy stimulatory and is not currently considering any increase in interest rates...” Annualized inflation was at a 15 year low, 0.1% with RBNZ expectations of below target inflation for two more years. Although part of the low inflation problem was due to the collapse in oil prices, a major import, the real concern may have been in the collapse of dairy prices. Governor Wheeler further noted “...Lower dairy incomes, lingering effects of drought, fiscal consolidation and the high exchange rate are weighing on the outlook for growth...” Lastly, “... On a trade weighted basis, the New Zealand dollar continues to be unjustifiably high and unsustainable in terms of New Zealand’s long-term fundamentals... ...The appreciation in the exchange rate, while our key export prices have been falling, is unwelcome...” Hence, Governor Wheeler reflected the RBNZ’s concerns about its export economy.

To no surprise, New Zealand’s primary export is concentrated milk, accounting for over 15% of total exports. (N.B.: New Zealand’s dairy exports will benefit from the TPPii). However, what is surprising is that New Zealand exports high quality crude oil, 3.80% of total, from its own fields mainly to Australia for refinement. (New Zealand has been expanding its crude oil industryiii ) Currently Crude oil is New Zealand’s primary import, at 10.82% of total. Nearly 50% of New Zealand’s total exports are concentrated in its top ten primary exports. Over 50% of New Zealand’s primary export destinations are concentrated in just five localities. In those top five, China imports nearly 30% of its milk concentrate; Australia accounts for nearly all of its crude oil production; the UK 24% of primary meat exports; Japan for over 27% of Bovine meat. 

Primary Exports and Primary Export Destinations

Hence, a too strong New Zealand dollar would have a negative effect on the export economy, thus justifying the RBNZ’s concerns. Lastly, it needs to be mentioned that the reconstruction from the damaged caused by the 2011 Christchurch Earthquake was nearly complete and with it government spending on the project.

By the 11 June meeting, the RBNZ decided that the export economy was more at risk than concerns over a booming housing market and reduced the OCR for the first time in 2015iv. 

The Japanese economy has shown occasional signs of improvement, like the GDP report of 22 May, but in the policy meeting statement, the tone was more cautious. In an 8 to 1 votev to continue with QQE citing moderate growth, noted that: “Risks to the outlook include developments in the emerging and commodity-exporting economies, the prospects regarding the debt problem and the momentum of economic activity and prices in Europe, and the pace of recovery in the U.S. economy...” Further, Prime Minister’s Shinzo Abe’s plan to reduce the nation’s debt would depend on a low rate policy for several yearsvi.
Inevitably, critics will argue that the weak Yen policy is designed to help the export economy. BOJ Governor Haruhiko Kuroda defended his price stability policy: “...I don't want to comment on currency levels or the speed of currency moves. It's important for currencies to reflect economic fundamentals and desirable that currencies move in a stable manner...”. However, it’s a challenge to differentiate a low rate policy of an export economy for the purpose of price stability, as with New Zealand’s policy and price challenged exports. In fact, Governor Kuroda went on to notevii that “...Central banks are pursuing policy for price stability...”. The point of the matter is that the BOJ and the Abe government are determined to continue with its weak Yen policyviii.

Price/Event Chart

It’s worth observing the Yen strengthening trend from the 11 June RBNZ meeting through the 9 September meeting. The dynamic is simple enough. Declining demand from New Zealand’s primary export destinations in addition to a dramatic decline in prices for crude oil and dairy exports was a clear sign that the RBNZ OCR must be reduced. Indeed, the OCR was reduced at the 23 July meeting and September 9 meeting. It was during that interval, the PBOC gave into market pressures and began a sequence of Yuan devaluation moves causing chaos in global asset marketsix. 

It should be noted that from the six month 22 April high of 91.938, to the 7 September low the Yen gained over 18.6% on the Kiwi. At the 9 September, the policy statementx noted that, “...Global economic growth remains moderate, but the outlook has been revised down due mainly to weaker activity in the developing economies. Concerns about softer growth, particularly in China and East Asia... ...While the lower exchange rate supports the export and import-competing sectors, further depreciation is appropriate, given the sharpness of the decline in New Zealand’s export commodity prices... ...At this stage, some further easing in the OCR seems likely...”

The RBNZ statements, combined with the BOJ’s statements indicating a continued QQE, presents an opportunity for the RBNZ to act as soon as practicable. So it’s not unreasonable to expect NZD/JPY to trade in a range of about ¥80 resistance and ¥83 support, at least until the next RBNZ meeting. 


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