NZD/JPY: Like Shouts in a Canyon

NZD, JPY, Like, Shouts Canyon, Fundamental analysis, Reserve Bank of New Zealand, BOJ, fx trader, forex

10 Feb 2016

The Reserve Bank of New Zealand may have started 2015 behind the curve. To be fair, although petroleum prices were weakening early in 2015, it does not remotely compare with prices in early 2016. There was also one much unexpected event in April of 2015. The EU had long planned to remove restrictions on dairy production but the reaction to the lifting of restrictions caused a dairy price catastrophe. Supply came on the global market in abundance driving prices down rapidly. Dairy is New Zealand’s leading export. Petroleum, although not a large export, runs a close second and is important to government revenues. Hence, the combination was a double blow to the New Zealand economy.

At the time the BOJ had a 0.1% deposit rate in place. This created a 340 basis point spread vs the RBNZ OCR of 3.50%, yet, remarkably, the Yen steadily gained on the Kiwi. Was the Asia-Pacific situation so uncertain that preservation of capital, via the BOJ, paramount to all other considerations?

At the 11 June meeting Governor Wheeler noted “...the fall in export commodity prices that began in mid-2014 is proving more pronounced. The weaker prospects for dairy prices and the recent rises in petrol prices will slow income and demand growth... ...A reduction in the OCR is appropriate... ...We expect further easing may be appropriate...”  The tone and statements clearly indicated the RBNZ realized that commodity dis-inflation was beyond transitory.

At the BOJ meeting a few days later, a cautionary but optimistic tone was noted and policy remained unchanged. On the other hand, two more RBNZ OCR reductions would follow in succession: first at the 23 July meeting and again at the 10 September meeting. Governor Wheeler again referred to the weakening economy and in addition sounded a note of caution on the potential of a stronger US Dollar1. “...Particular uncertainty remains around the impact of the expected tightening in US monetary policy...”

At the 10 September meeting the RBNZ decided to reduce the OCR down to 2.75% (from 3.50% in April 2015). It should also be noted that by the September meeting, the Reserve Bank of Australia had still maintained its OCR at 2.00% since May of 2015. Further, the RBA had made a similar observation about the length of the commodity price downtrend. Hence, both the RBNZ and the RBA still had a large basis point advantage over the BOJ, in a global environment where high quality yields at or above 2.00% had become more of the exception rather than the rule.