Cameron Bagrie –
The vibe from my recent trip to Asia has not inspired confidence regarding the region’s near-term growth prospects, but we still believe in the positive medium-term story. Risks and challenges are clear.
Although the domestic economy is still chugging along well, it reinforces that the risk profile for the Official Cash Rate (OCR) is still skewed lower.
We continue to closely watch the five factors we listed last year (China, funding markets, domestic inflation, credit growth and the New Zealand Dollar) to determine whether a change in our view of a stable OCR is warranted.
However, for now, across real economic barometers we expect the positive vibe apparent in late 2015 to extend into 2016; the economy is looking okay.
Interest Rate Strategy
Concerns over the outlook for China and lower oil prices are expected to keep markets on edge. Low domestic inflation and a benign short-term inflation outlook are expected to support receiving-side interest, with market pricing for OCR cuts to intensify, despite the NZD’s adjustment to date.
Risks for NZD/USD remain firmly skewed to the downside with China and commodity prices clearly warning of further weakness. However, in the short term sentiment is already weak and technical indicators are oversold. We prefer to sell rallies rather than position for further immediate declines.
NZD/AUD strength demonstrates that markets expect the New Zealand economy to hold up better than the Australian economy, a theme we concur with and expect to be borne out in the data.
Views on China’s ‘actual’ growth story – and prospects for wider Asia more broadly – were much more subdued relative to prior trips. There were some genuine worries over whether Chinese authorities have actually lost control of some key market variables.
Views seemed to oscillate from day to day on this, in part because market participants were dealing with regulatory changes on a daily basis, hinting of heavily reactive policies. One policy response often created leakage elsewhere, somewhat akin to the game whack-a-mole; you whack one mole with your hammer and another pops up!
The consensus was that China’s RMB was going down, either in a managed fashion or potentially in a one-off hit. A weaker currency exports one’s problems. It also means a NZD on a TWI basis that will struggle to push materially lower despite recent movements in the NZD/USD.
We heard many stories about capital flight from China; in some instances, a capital loss was being accepted simply because it was the lesser of two evils versus waiting for currency depreciation.
Any views were low-conviction ones, if they existed at all. We were constantly asked for our thoughts on the state of play; we had a view, but found the question ironic given we observe the region from afar (though sometimes that can be an advantage).
Cameron Bagrie is Chief Economist at ANZ Bank. The above is a shortened version of his original analysis which can be accessed at www.anz.co.nz
