BNZ Strategist and Models & Technicals

BNZ Strategist and Models & Technicals

Economic Outlook
While the New Zealand economy will be battered by the global recession, we don't believe it will be fried by it. In support, substantial amounts of monetary and fiscal ammunition are being fired with great guns. This is happening against a backdrop of a relatively sound financial system, amid clean and sensible economic policies more generally. Another buffer for the NZ economy, of sorts, may well come in the form of an immigration boom. We say "of sorts", in that as much as this promises to offer a lifeline to the housing market, and consumer spending, it will probably inflame the unemployment rate at the same time. As for the immediate domestic data, there's not much to speak of for the coming fortnight. The 26 February NBNZ business survey is the next big one. In the meantime, New Zealand will be at the mercy of the international news and all that it entails for our economy and financial markets.

Interest Rate Outlook and Strategy
Following the recent ups and downs, we are left on the dovish side of current market expectations on interest rates. The RBNZ has clearly abandoned its rhetoric of resistance of late last year and is now very focussed on the global news and attendant downside risks. For these reasons, and our existing belief the world economy will get worse before it gets any better, we are happy to keep 2.00% in view for the OCR. The market currently sees a low of between 2.25 and 2.50%. All in all, then, we would look to keep or establish long positions, but with the mindset of trading ranges rather than hoping for the sort of one-way traffic on rates we've become accustomed to over recent months. For longer-dated yields, while increased government bond issuance is an upside threat we believe the recent sell-off has minimised the chances of any further moves in that direction, for the meantime. As for yield curve shape, trends are now much trickier to pick, following the increased steepening we've witnessed.

Currency Outlook
While NZD/USD has been trading within a range of 0.5000 to 0.5500 for a good while now, we still think it's too soon to say with any certainty that it has troughed. We will only feel comfortable in assuming so when the global backdrop stabilises. We haven't seen much, if any, evidence of this – and certainly not in the context of the full checklist we're looking at. And even when this checklist starts to get ticked off, any clear recovery in NZD will probably have to wait until the NZ economy itself exhibits signs of stabilising. In the meantime, all we can say with any degree of comfort is that the 0.5500-0.5550 region should probably limit any upward moves, while 0.5000 has tended to elicit strong demand on the dips.

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