Global Head of Macro Strategy
Summary: The New Zealand government moved aggressively against housing speculation with a raft of new measures overnight, a loud policy signal that the whole world should pay attention to, as policies aimed at inverting the K-shape are going to spread aggressively around the world. Also, commodity dollar pain and easing US yields driving a steep yen recovery ahead of US treasury auctions.
FX Trading focus: New Zealand moves aggressively to “invert the K”
The kiwi sold off heavily overnight on news that the New Zealand government moved against the rise in housing prices with a raft of measures. It should have been clear, in perfect hindsight, that something was on the way, after all the leftist populist government was clearly appalled by the New Zealand’s housing prices rising rapidly and becoming the most expensive among all OECD countries last year after the RBNZ’s rate slashing in response to the Covid pandemic. The first measure the government took was an update of the RBNZ’s mandate to consider housing prices in its policy mix, an idea that was floated in November of last year and made reality in late February – going into effect on March 1.
But overnight, we got a true hammer swinging against the rentier class, as the government will enact a number of measures to prevent the rise in housing prices by altering the tax code to make property investment and buy-to-let less profitable. In addition, the government will open up land for new property development to expand the supply of housing. Among the tax code changes: capital gains on investment properties will now be taxed for any property held less than 10 years (versus 5 years previously) and mortgage interest costs will now no longer be deductible versus rental income, a move against buy-to-let (or at least borrow to buy to let) investing.
Chart: NZDUSD weekly
A tremendous move in NZDUSD and other NZD-crosses after the NZ government’s move against housing speculation will slow growth at the margin and slow inbound investment (important to offset NZ perma-current account deficits). This could take NZDUSD well south of 0.7000 and possibly to at least the 0.6800 area that was an important resistance level on the way up.
But the bigger impact here is the signal value of a move like this – here is the first government that is taking a truly heads-on approach at pushing back against the unintended consequence of too easy monetary policy that supercharges the upside for incumbent wealth and the “rentier class” while leaving behind the lower income and especially the young who have no prospect of climbing on the wealth ladder when asset prices soar out of reach. This is a real move to “invert the K” and it will spread to other countries quickly. Perhaps New Zealand was one of the first movers with a policy like this because it was so quick to get ahead of the disease itself.
Speaking of the K-shape: in the US, for example, US Secretary of Treasury Yellen has pointed to a K-shaped economy that was already in place pre-Covid and made even more K-shaped in its wake. We should use the NZ government response as a model for how other governments are likely to move with similar measures to invert the K – via taxation, regulation and demand side reform after almost two generations of monetary policy and supply side dominance.
Odds and ends
USD ascendant – the NZD sell-off has taken NZDUSD to new lows for the year below the prior clearly etched range low near 0.7100. And AUDUSD is looking interesting for a potential head-and-shoulders setup if it continues back toward 0.7620 that could see it testing the 0.7400 level on a breakdown. Elsewhere, EURUSD couldn’t mount much of a rally yesterday despite falling US yields and strong risk sentiment, making us wonder what can push back against a further greenback comeback here.
US Fed Chair Powell and US Secretary of Treasury Yellen on tap today and tomorrow – they are testifying on the CARES act (pandemic response package) one year after its passage. Their testimony has been released here and here, and has not generated any new major waves, but interesting turns of phrase or attitudes, particularly important from Secretary Yellen, could come up in the testimony and questioning from US lawmakers today and tomorrow.
USDTRY: note the forwards more than spot levels. The totally unexpected central bank leadership shuffle at the weekend has led to an explosion in forward implied yields – meaning that it is very difficult to speculate in general, but especially on the short TRY side as a huge devaluation is already priced into the forward curve with 1-month forward implied yields for USDTRY, for example, at 90% as of this writing (that translates to a 1-month forward price of 8.52 versus spot price of 7.87)
GBP consolidating, is GBPUSD at 1.3500 possible? – we noted sterling wobbling yesterday and now it has effectively keeled over against the US dollar – with the 1.3750 area in play already this morning, while the bigger level lower is 1.3500. EURGBP bears will want to start re-engaging first: we’ll sit on our hands until at least above 0.8700, with 0.8800 quite possible without affecting the bear trend status.
US Treasuries in coming days and the JPY – note the US Treasury auctions starting today (2-year), with more important ones ahead for tomorrow (5-year) and Thursday (7-year). The JPY is rising even as the US dollar rises, a very strong performance and the mirror image of the carnage of the moment in commodity FX (look at NZDJPY, oh my) and to a degree in EM. If the US auctions are calm and orderly and we see a further consolidation in yields lower into quarter end (also financial year end in Japan), we could get quite the snapback rally in JPY crosses.
Graphic: FX Board of G10 trends and momentum
New themes in evidence on our trend evolution readings for the FX Board, as NZD lurches into a pronounced downtrend that will deepen as the trend algorithm’s “smoothing” catches up more with current spot levels in the next day or two. Also note the enormous positive momentum shift in the JPY and the USD attempting to establish a broader up-trend here.
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