thoughts on AUD and NZD in light of recent events
We were stopped out of our long AUD/NZD after the stronger than expected NZ labour data on Wednesday.
We were surprised at the strength of the data, like everyone else. In particular, it seemed out of line with the persistently weaker than expected business surveys over the last year. The RBNZ was also surprised by the strength in the data. Their quarterly policy statement forecast a more gradual decline in the unemployment rate, remaining above 4.0% over its forecast horizon into 2021, and predicted softer GDP growth in the second half of this year on the back of the weaker business surveys.
The drop in the unemployment rate from 4.5% to 3.9% was sharp. The underutilization rate fell more sharply from 12.0% to 11.3%, a low since 2008. New Zealand’s labour data has a tendency to be more volatile than other major countries, which may in part reflect its relatively small size, but does suggest some caution in over-interpreting the results. Nevertheless, the data was strong enough to place in question the outlook for the New Zealand economy.
It may well be stronger than we thought, and the business surveys may not be doing a good job of predicting underlying strength in the economy.
Even before this employment data, the RBNZ’s assessment was that the labour market was essentially fully employed and wage pressure should start to build.
Wage growth overall remains subdued. The adjusted LCI dipped from 1.9% to 1.8%y/y in Q3, but it is up from the lows last year at 1.6%. The gains reflect a minimum wage increase and pay settlement increase for healthcare workers. As such, it can be explained by special factors. Nevertheless, the government in planning incremental increases in the minimum wage each April for the next two years, and this may start to generate a bit of upward momentum for wage growth more generally, in the context of a tight labour market.
The unadjusted LCI was steady at 3.3%y/y growth in Q3, but up from 3.0% in the first half of last year. Ordinary time hourly earnings, that are more volatile and reflect compositional changes in the labour market were higher than expected in the quarter, but slowed from a year earlier from 3.0%y/y to 2.9%y/y, but have risen more abruptly from 1.6%y/y in Q2 last year.
The wage data are not convincingly showing stronger growth, but it has picked up over the last year, and this may be indicative of a tighter labour market. Underlying inflation has also increased over the last year, so overall, price and wage trends suggest that capacity pressures are evident in the economy. As such, the RBNZ’s rates on hold through to 2020 outlook may be underscoring the risk of rate hikes in NZ.
On the other side of the Tasman, however, the Australian labour market data has also been much stronger than expected in recent months, perhaps with less impact on the AUD than the strong NZ labour market data.
This was one of the reasons for our long AUD/NZD position preceding the NZ labour report. We also anticipate a lift in the Australian wage growth data due next week, with little reason for a weak Australian employment report for October, except perhaps for some given-back in the unemployment rate after its recent sharp drop from 5.6% in April to 5.0% in September. The leading indicators of the Australian labour market remain strong, including vacancy data and business surveys.
This appears to partly explain the RBA’s modest upward revision to GDP growth outlined in their policy statement on Tuesday. Our inclination is, therefore, to still buy the AUD/NZD, and we may do so again.
On the other hand, delaying our re-entry is the lack of recovery in Chinese asset markets and weaker energy prices that affect Australian exports of coal and natural gas.
We are also trying to take stock of a range of uncertain global events and fallout from the US elections. Given we have had a number of losing trades of late, we are taking a more cautious approach to new positions.
That said, we would not be surprised to see the AUD/NZD rebound today on the release of the RBA quarterly statement. The policy statement on Tuesday already revealed upgrades to GDP forecast and even a lift to the end-2020 inflation forecast to be at the target of 2.5%. The tone of the statement should be upbeat. We were surprised that the market did not push the AUD up more on the release of the statement on Tuesday.