Australian dollar roars on RBNZ hawks

Yesterday the NZD carried the Australian dollar higher after a hawkish RBNZ statement:

Now that operational constraints have been addressed and the OCR can be lowered further if necessary, we believe it is appropriate to return to our long-standing practice of publishing an OCR projection (figure 2.17). This projection is conditional, in that it communicates the policy path required to meet our monetary policy objectives subject to the economic outlook and the assumed impacts of other monetary policy tools. Future changes in the economic outlook should be reflected in shifts in the OCR projection.

There continues to be more stimulus provided than captured in the OCR projection. This reflects the ongoing stimulus from the Large Scale Asset Purchase (LSAP) programme and the Funding for Lending Programme (FLP). However, monetary conditions have tightened since the February Statement, due to higher international and domestic long-term interest rates. The current economic outlook implies that continued monetary stimulus remains necessary to meet our inflation and employment objectives sustainably over the medium term.

It’s the chart that shot the NZD higher (and AUD in sympathy):

Kiwis had better prepare for a much higher NZD dollar if that is to be their rates path ahead. Cripes.

But the relevance to the RBA’s tightening timetable is minimal. Unemployment in Australia is materially higher than NZ at 5.5% versus 4.7%. Underutilisation is also higher at 13.3% verse 12.2%.

The RBNZ already has macroprudential tools deployed, which the RBA will want to use in Australia long before any cash rate tightening.

Australia also has its implicit mortgage rate tightening to come as the RBA’s TFF rolls off.

Then we’re going to see commodities come off very sharply over the next year as China slows, hurting income growth especially.

Add to that the Chinese trade war that is causing all kinds of sectors to adjust to other markets and the RBA will want to protect competitiveness to best enable them to.

Then there’s the AUS/ NZ travel bubble which dramatically favours the latter.

Finally, the moment the forthcoming election is over, the Morrison Government (and probably Labor it appears) will flood Australia with cheap foreign labour again, crushing wages and inflation, while the Ardern Government is reforming its immigration program to protect wage growth.

There are few comparisons to make over the stretch.