NZ: Economy still has solid credentials - ANZ

Analysts at ANZ present their economic assessment of the NZ economy and the likely impact on the kiwi interest rates and appropriate currency strategy.

Key Quotes

“Economic overview: The supply side is responding to considerable housing pressures in Auckland, but barely sufficiently to keep up with demand. Two challenges, namely cost escalation and capital constraints (especially in the multi-dwelling space) risk curtailing the supply side response further. Finding skilled labour is an additional issue. While there are some natural ways the ‘market’ could offset demand-side strength (increased inter-regional migration and larger household sizes), headwinds to supply growth reinforce how correcting Auckland’s housing imbalances and affordability challenges is a multi-decade undertaking. In data this week, dairy prices are expected to slip, while trends in migration and visitor arrival figures (next week) should stay strong.” 

“Interest rate strategy: Short-end rates continue to range trade. And while they are yet to gravitate lower towards levels more in line with the RBNZ’s projections, they have ample scope to do so. However, with cross-currents aplenty (mortgage-related paying, talk of tax cuts, and upbeat Fedspeak versus the high TWI and RBNZ dovishness), the market is eager to pay into dips, so any dips will be shallow. Better-than-expected US data and the chorus of Fed governors has been noticed at the short-end of the US curve, with a March hike now “live”, but US Treasuries remain range-bound. From our viewpoint, the risk is we see a break higher in Treasury yields, with knock-on consequences locally. However, with Japanese bonds holding steady, German bund yields lower and UK gilt yields back at their lows for the year, the overall global bond backdrop is less menacing than it might have been.” 

“Currency strategy: The USD looks set to be in the box-seat over the next month. It has become increasingly clear that the Fed has met its dual mandate, meaning the March FOMC meeting is “live”. New Zealand still has solid credentials, so we expect it to remain in a holding pattern for now. And while we can see some pro-cyclical elements of the economy turning, we do not believe they are sufficient to materially influence NZD direction yet. For that we need to see the global liquidity cycle turn.”