WELLINGTON: The New Zealand Dollar remains unable to sustain a push higher as the macroeconomic data continues to prevent a risk-on rally, which NZD benefits from to be sustained. Unfortunately, unable to sustain a rally doesn’t bring a lot of optimism to bulls as worries about RBNZ & continued pain in the dairy industry continues to be a drag on the economy, and we saw this weekend that PPI and consumer confidence came in rather soft.
The Fonterra Global Dairy Trade (GDT) Index dropped 2.8% while whole milk powder price index dropped 3.7%. However, NZD was stable after the print, but the ramifications of what’s happening in the Dairy industry may soon affect the banking sector in New Zealand.
The Wall Street Journal ran a great piece this week detailing the non-performing loans (NPLs) are compounding as whole milk powder has fallen by a 33% since October at a time where borrowing has skyrocketed to make up for the drop in operating cash flow. Late last year, the RBNZ noted that ~80% of farmers are likely working with negative operating cash flows, which will further strain the NPLs. The RBNZ also estimates that loans to dairy producers make up roughly 10% of bank lending in the region.
More and more focus has been placed on the March RBNZ meeting as 2y inflation expectations continue to fall in New Zealand, and this week reached the lowest level since 1994. RBNZ Governor Wheeler recently shared that, “Looking ahead, monetary policy will continue to be accommodative.
With the ongoing weakness in commodity prices, and particularly oil, it will take longer for headline inflation to reach the target range. On the other hand, annual core CPI inflation, at 1.6 percent, is well within the target range, and the Bank’s combined measures of annual inflation expectations, averaging 2 percent, are more encouraging in terms of consistency with the PTA. However, we would not wish to see inflation expectations become unstable and decline significantly.” Combining the worsening macro outlook, dairy developments, and RBNZ’s attention being grabbed by inflation, traders are anticipating two 25bp cuts from the RBNZ this year.
This week, we’ll see New Zealand Trade Balance, which is expected, widen further from last month’s reading of -53m toward economists’ expectations of -250m as exports, which the economy relies upon for real growth continues to lag imports. There isn’t a huge amount of data until the RBNZ March meeting. Up to the meeting, we have an environment where risk-sentiment will be the key driver for NZD, and if the Japanese Yen is any indication, the bird could be heading lower.
