New Zealand dollar fell dramatically

New Zealand surprised the market with a interest rate cut (25 bp to 8%), which observers had not expected until Sept. According to the FT, the NZ central bank indicated it’s just the start of an easing cycle. The New Zealand dollar fell dramatically, of course, but the more important idea is that if growth is slowing drastically everywhere, maybe other central banks will be cutting instead of hiking. We already think the ECB will stay its hand because of gloomy incoming data. What if the Fed is delaying rate hikes now because of the financial/housing crisis and continues to delay afterwards because of slowing conditions? Slowing conditions reduce inflationary pressure, or so the central banks might think (at least in the absence of commodity-driven inflation).

A separate opinion piece in the FT today suggests that if high-yielders are becoming less high-yield, the carry trade can fade in importance. This suggests the traditional funding currencies, the Swiss franc and Japanese Yen, might be getting reverse flows inward as the risk of holding foreign assets outweighs an ever smaller favorable differential. Well, maybe. We say the risk of holding New Zealand or Australian paper is practically zero. Even if Japan were to start hiking and the high yielders start cutting, the differential will still favor the high yielders for months, if not years. The absolute level counts and not just the change.

Besides, a drop in commodity prices (oil) is a wish and a supposition, not a fact.

Barbara Rockefeller

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