Axiome September update 2018

The pace of global growth remains strong and is expected to remain above trend levels, despite clear escalation in the Trump Administration’s trade war.  US tariffs are now higher than all other developed economies and approaching levels in Russia and China (figure 1).  Despite this development, US GDP for the June quarter was 4.2% (annualised), the strongest reading in over four years.  New Zealand GDP was also strong at 4% (annualised), or twice the pace expected by the Reserve Bank of New Zealand (RBNZ).  NZ business confidence also rebounded from the funk it had been in since the election.

Given the strong NZ data, markets backed off from the view that our economy is slowing, and that the RBNZ may need to cut future interest rates.  This change in view arrested the decline in the NZ dollar over the month of September, although over the quarter our currency is still around 4.5% lower against the USD, and over the year it is 8% lower.

At present levels the RBNZ estimates that our exchange rate is in the ‘goldilocks zone’ that supports exporters and household spending and keeps our trade balanced.  Through this lens the Kiwi should stay put.  But should is not the same as will.  Our terms of trade are at record highs, which argues for a higher currency level.   In addition, inflation expectations are now around target levels and may increase faster, forcing the RBNZ off the fence.