Another drop in the bucket to floating mortgage holders, another notch carved in the annals of fixed interest history.
The Reserve Bank took our Official Cash Rate (OCR) to an all time low of 2 per cent this week. That thorn in the side of domestic inflation, a high New Zealand dollar, refuses to play ball though. What is going on? We lower our nominal rate and our currency gets stronger?
If you have been playing by the textbook, and the Reserve Bank has, you will be forgiven for your confusion. There are two parts to this week's New Zealand dollar move. The first of these is that the OCR cut was widely expected. It was also foreseen by institutional investors that it would be larger.
So, some of the big boys shorted the heck out of our dollar before the announcement, thinking that the Reserve Bank governor would unveil a 50 basis point cut, not 25. The announcement was, of course, in the right direction, but not as much as expected. So, a 50 basis point cut was priced in, it didn't eventuate and the market revalued the currency higher.
The short sellers, sweating at their desks, had to scramble to cover their bets, now in the red. The resulting massive "squeeze" as they rushed to buy currency to minimise their losses jockeyed the kiwi higher. That's the first part.
The second, bigger, part is more pervasive. We are not the only country trying to spur growth by chipping away at our national rate of interest, hoping our rate of exchange will follow.
Our collective problem is that this now does not work. In the past, chopping off bits of your OCR usually did have a negative effect on the FX markets in your favour. Now, guess what? The Wall Street Journal notes: "Rate cuts by global central banks have done little to weaken surging currencies. In theory, loosening monetary policy should lower a currency's value. However, all this year the opposite has been happening."
Bloomberg reports: "The traditional monetary-policy playbook calls for steps to weaken foreign exchange values in order to spur domestic inflation and make a nation's exports more competitive in global markets. Unprecedented stimulus policies from Europe to Asia this year have only sent currencies higher, frustrating efforts to spur economies."
Graham Wheeler states: "No matter what I do, the market will still want more." He is dead right, just look around. Further, from the Wall Street Journal: "It isn't just the smaller economies in Asia: The Bank of Japan has had the same problem. A rate cut that took interest rates negative for some deposits at the start of the year has prompted a surge of yen buying and a 15.9 per cent rally in the currency. And globally, the same phenomenon is occurring. Rate cuts in Indonesia, Russia, Hungary, South Korea and Taiwan in the past year have all done little to weaken surging currencies."
This now looks like a distinct "race to the bottom", which was another phrase doing the rounds this week. It is a competition that we are caught up in whether we like it or not. You might be wondering: how low can we go? Well, look at our Swiss and Japanese counterparts. Already negative on rates, and having monetised government bonds, they're now starting on buying equities. At least we, down here in the sticks, still have 2 per cent to play with.
- Caroline Ritchie is a former AFA, sharebroker and portfolio manager. She runs Investment Stuff, a sharemarket based investment coaching service. Visit her at www.investmentstuff.co.nz. This column is not personalised financial advice.