Australia and NZ: Too early for “normalisation” - Westpac

Analysts at Westpac think it’s too early for “normalisation” process to begin as far as Australian and NZ economies are concerned.

Key Quotes

“Australia

• The “normalisation” thematic made a dramatic entry into the Australian market with the release of RBA’s July minutes. The discussion of a 3.5% “neutral nominal rate” saw the market price in a far greater risk of RBA hikes in the near term than previously expected, with obvious impacts in currency and rates markets.
• Debelle’s speech quelled these fears stating that while the bank discussed neutral rates, “[n]o significance should be read into the fact the neutral rate was discussed at this particular meeting” and the fact they were discussing neutral rates has no implications for near term policy.
• Nevertheless AUD has been among the strongest G10 currencies this year (+9.8%), with this RBA normalisation discussion occurring at time of USD weakness, Chinese economic strength and commodity price upswing. A perfect storm for our weaker AUD forecast. We still see a weaker AUD through 2H17 and into 2018 – underpinned by: RBA firmly on hold; the Fed to raise rates again this year and commence balance sheet normalisation; commodity prices to converge back to cost curves in 2018 and China to soften in 2018.
• The local economic data (retail sales, exports and employment), confirm that conditions have rebounded from early 2017. However, persistent weak wages growth is restraining consumer spending. We forecast annual GDP growth to be a trend 2.8% in December 2017, slowing to 2.5% in December 2018 as the home building cycle turns down.
• Housing remains central to policy outlook while macroprudential and regulatory changes are exerting de facto tightening and impacting sentiment. APRA finalised their “unquestionably strong” system capital requirements leading to a positive equity reaction although more muted implications for credit.”

“NZ

• The Q2 CPI disappointment strengthens the RBNZ’s case for remaining on hold this year and next. However, markets are still clinging to the view that the RBNZ will hike by August 2018.
• However, we think market pricing for OCR hikes is too early, and we forecast RBNZ on hold until early 2019, with low interest rates still a key support for economic conditions.
• For the NZD, NZ fundamentals are becoming more mixed, but are subservient to US influences. As long as the USD remains downtrodden, NZD/USD will remain elevated. If the USD eventually rebounds, as we expect, on Fed tightening, NZD/USD should retreat.”