RBNZ Refuses to be Trumped 2

NAB Business Survey: Slowing 5

Carbon and Commodities 7

NZD: Trump Win USD-Supportive 8

FX Momentum Model 10

The BNZ OIS-ter: Looking Ahead 11

Interest Rate Strategy: A Low Point 12

NZ Economic Review 14

NZ Upcoming Data/Events 16

Quarterly Forecasts 18

Forecasts 19

Calendar 20

Contact Details 21

Economic Outlook

The New Zealand economy is booming and yet there is no

consumer price inflation. This remains the clear message from

recent economic data. The ongoing lack of inflation and influence

on inflation expectations has seen the RBNZ progressively lower

the OCR including, as expected, another 25 basis point cut today,

to a record low of 1.75%. But this was accompanied by a strong

acknowledgement by the Bank that further cuts are unlikely to be

necessary, which is in line with our view that the OCR will be on

hold through 2017. We anticipate annual GDP growth of over 3%

to continue in 2017, with associated pressure on resources to

bring some pickup in inflation. The inevitable question today is

what a Trump victory will mean for RBNZ policy. In our opinion,

and clearly the RBNZ’s too, not much in the near term. More

generally, we see global trade and potentially large US fiscal

expansion as key areas to watch over coming months and

years especially via their potential influence on US inflation

and interest rates.

Interest Rate Outlook and Strategy

True to its word, the RBNZ cut the OCR this morning, to 1.75%.

We believe this will mark an historic and cyclical low. We expect

it to be sustained at this level throughout next year, before a

gradual hiking cycle takes hold in H1 2018. Consistent with this

view, we see current NZ 2-year swap (circa 2.25%) as close to

‘fair value’. However, we continue to see the mid-curve (3-5-year)

as more vulnerable to upward pressure over the medium-term.

We also now see potential for a slightly higher range for US 10-

year yields. In turn, this suggests a higher range for NZ 10-year

yields and steeper NZ 2y10y curve. Meanwhile, NZ 10-year swap

spreads have widened, but we are still targeting a further move

up to 35bps. Finally, from a strategic perspective we look for

wider NZ-AU 2-year swap spreads.

Currency Outlook

Trump’s election victory was a surprise. Our long-standing

assumption had been a Clinton victory. That said, our projections

embody a stronger USD outlook and at first glance the Trump

factor adds weight to that view. We maintain our NZD forecasts

of USD0.72 for end-2016 and USD0.67 for end-2017. Trump’s

economic policies are more inflationary than the Clinton

alternative, driven by more expansionary fiscal policy. This adds

to the chance of tighter US monetary policy and a stronger USD.

A possible change to taxing offshore company profits could also

support the USD. Trump’s trade policy is the biggest concern for

the US economy and USD. We’re hopeful that trade policy is only

tweaked rather than over-hauled, and in the meantime treat this

as only a risk factor for the USD.

Contents

Cash rate cut to 1.75%

Rates now on hold for a long time

Despite sub 2.0% inflation forecasts

No need for fiscal stimulus, says Governor Wheeler

Trump of little interest

The RBNZ has delivered a hawkish cut. As anticipated, the

cash rate was lowered to 1.75% from 2.00% but this was

accompanied by a strong acknowledgement that further

cuts are unlikely to be necessary. That said, the door has

still been left ajar to further reduction with the Bank

intimating a 20 to 25% potential for a further move lower.

It seems to us that the RBNZ is finally voicing the fact

that the economy is growing sufficiently strongly to not

warrant any further increase in stimulus despite CPI

inflation remaining low for a significant period of time.

Indeed, annual CPI inflation is not forecast to reach the

mid-point of the RBNZ’s target band until December 2018.

Importantly, the Bank specifically confirms that it is

“flexible in its inflation targeting approach. The projected

path for the OCR is one that supports strong but steady

growth in the economy and provides for a gradual

increase of inflation towards the target midpoint.

More aggressive policy easing to drive inflation to

the midpoint of the target range much sooner risks

generating unnecessary volatility in output, interest

rates and the exchange rate.” Hoorah!

The Bank restated the key factors that most likely would

cause it to change its view. In short they are:

– A higher New Zealand dollar, higher funding costs,

lower export prices, weaker commodities and lower

inflation expectations, which would result in the need

for further stimulus;

– Higher net migration, stronger house price inflation

and stronger consumption, which would need less

stimulus.

Without going into too much detail at this stage, we see

the cumulative balance of risk from the above being

dominated by downside outcomes but we still don’t

think it will be enough to cause the RBNZ to ease further.

Accordingly, we maintain our view that 1.75% is the

trough in the rate track.

The RBNZ restated its view that the exchange rate

“remains higher than is sustainable for balanced economic

growth” and that “a decline in the exchange rate is

needed”. We are not convinced that either of these

comments is accurate but we do share the view that

the NZD TWI will eventually drift lower, largely as a

consequence of developments offshore rather than

because of domestic factors. In particular, it is based

on our view that the Fed tightens.

2.0% Here We Come?!

That said, the fact that the RBNZ downplayed the

prospect of further easing, initially resulted in the NZD

appreciating post the Monetary Policy Statement (MPS)

release. It has since corrected lower but on a TWI basis

now sits at 78.8. This is already 2.6% higher than the 76.8

average assumed by the RBNZ for the December quarter.

Nonetheless, we reckon the RBNZ will get a get-out-of-jail-

free card for any currency strength from the dairy sector.

The RBNZ has explicitly stated that it believes the current

level of dairy prices to be unsustainable and still assumes

that prices tend towards $3,000 tonne over the medium

term. This may well be the case medium term but we

think dairy will provide more stimulus to the economy over

the next 12 to 18 months than the Bank has assumed.

This will thus justify a stronger for longer currency.

Moreover, it is notable that the stronger starting point

for the TWI this MPS compared to last did not result in a

meaningful reduction in future CPI forecasts anyway.

The RBNZ again noted its concern that house price

inflation is posing risks to financial stability. It also

highlighted the relative weakness in housing market

NZD Stubbornly Strong

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Annual % change Consumers Price Index

RBNZNovember

MPS

BNZ

Source: RBNZ, Statistics NZ, BNZ

Target low

Quarterly

Target peak

Forecasts

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Index

Quarterly

NZ TWI(Qtr avge)

Source: BNZ, RBNZ

NovemberMPS

BNZ

Forecasts

Current TWI

RBNZ Refuses to be Trumped

Troughed!

activity post the LVR changes that have been made.

Nonetheless, it is equally clear that the Bank is unwilling

to read too much into recent developments, instead

needing more time to see how sustainable the recent

downshift in activity and pricing will be. Moreover, its

published forecasts still predict another 17% increase in

house prices over the next two years – hardly the stuff to

scare off buyers! Interestingly, Governor Wheeler said in

his post MPS news conference that he had no immediate

intention to implement any Debt to Income (DTI) lending

constraints as had been feared (and expected) by some.

He actually doesn’t have the option yet as it hasn’t been

signed off by the Minister of Finance but Wheeler said he

wouldn’t be implementing DTI policy even if it was given

the go ahead by Government.

Another point of interest from Wheeler’s press conference

was his comment that the New Zealand economy doesn’t

need any help from fiscal stimulus at the moment. It

doesn’t seem that long ago that he was intimating the

opposite. There are a number of conclusions that can be

drawn from this not the least of which is that the RBNZ

really is confident that there is enough growth in the

economy to generate its requisite inflation track. But, if

this is the case, it’s also problematic for Government.

The strength of the economy is delivering an unexpected

cash windfall. Going into an election the populace will be

demanding the Government spend some of this windfall

at a time when any such increase in expenditure risks

crowding out the private sector, pushing inflation higher

and, perhaps, providing upside risk to the Bank’s OCR

track.

More Capital Gain Ahead

The inevitable question today is what a Trump victory

will mean for RBNZ policy decisions. In our opinion, and

clearly the Governor’s too, not much in the near term.

From our perspective, the two key Trump outcomes

that New Zealand should be interested in are:

– He’s anti-globalisation so will stymie TPP and the

stimulation of global trade generally. In the first

instance this might be negative for New Zealand but

might just mean that New Zealand has to be more

effective in making bilateral rather than multilateral

agreements.

– Trump’s expansionary fiscal tendencies are likely to

result in higher US inflation and higher US bond yields.

These higher yields will also put upward pressure on

New Zealand longer dated interest rates. It may also

result in a higher USD.

We, like everyone else, will need more time and detail

before drawing any firmer conclusions so, for now at

least, it will have no real bearing on our forward OCR

interest rate track.

Our formal forecasts, which are unchanged as a result of

the MPS, have the cash rate on hold for a considerable

period of time. We forecast a first rate hike in May 2018.

For all intents and purposes, this is too far away to be

meaningful. Nonetheless, we want to deliver the clear

message that the trough in the rate cycle is probably

now upon us, so investors and borrowers alike should

be contemplating now what a world of rising interest

rates might look like.

Full text of today’s RBNZ OCR Review on the next page.

stephen_toplis@bnz.co.nz

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%

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Source: BNZ, RBNZ

Forecasts

New (lower) Neutral?

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House PricesAnnual

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QuarterlySource: RBNZ, BNZ

RBNZForecasts

The full text of today's RBNZ OCR Review – Official Cash Rate reduced to 1.75 percent

The Reserve Bank today reduced the Official Cash Rate (OCR) by 25 basis points to 1.75 percent.

Significant surplus capacity exists across the global economy despite improved economic indicators in some countries.

Global inflation remains weak even though commodity prices have come off their lows. Political uncertainty remains

heightened and market volatility is elevated.

Weak global conditions and low interest rates relative to New Zealand are keeping upward pressure on the New Zealand

dollar exchange rate. The exchange rate remains higher than is sustainable for balanced economic growth and, together with

low global inflation, continues to generate negative inflation in the tradables sector. A decline in the exchange rate is needed.

Domestic growth is being supported by strong population growth, construction activity, tourism, and accommodative

monetary policy. Recent dairy auctions have been positive, but uncertainty remains around future outcomes. High net

immigration is supporting growth in labour supply and limiting wage pressure.

House price inflation remains excessive and is posing concerns for financial stability. Although house price inflation has

moderated in Auckland, it is uncertain whether this will be sustained given the continuing imbalance between supply and

demand.

Headline inflation continues to be held below the target range by ongoing negative tradables inflation. Annual CPI inflation

was weak in the September quarter, in part due to lower fuel prices and cuts in ACC levies. Annual inflation is expected to

rise from the December quarter, reflecting the policy stimulus to date, the strength of the domestic economy, and reduced

drag from tradables inflation.

Monetary policy will continue to be accommodative. Our current projections and assumptions indicate that policy settings,

including today’s easing, will see growth strong enough to have inflation settle near the middle of the target range.

Numerous uncertainties remain, particularly in respect of the international outlook, and policy may need to adjust accordingly.

The NAB Monthly Business Survey is now suggesting

some moderation in the non-mining economic

recovery, with the aggregate level of business

conditions trending lower – although it remains

above long-run average levels.

Business confidence was also down in the month.

The recent moderation in some NAB Business Survey

indicators is a concerning trend that warrants close

monitoring, but our assessment is that the

deterioration to date is not (yet) enough to warrant a

significant change in the outlook.

However, this may change if the recent trends were

to continue.

Beyond the near-term, impetus from commodity

exports and housing construction will fade which will

see the economy slow into 2018.

We still expect two more 25bp rate cuts from the RBA

next year in response to on-going low inflation and a

more subdued growth outlook.

Above-average business conditions in the October

NAB Monthly Business Survey indicates solid

performance in the non-mining economy, however,

the emerging downward trend might suggest the recovery

is running out of steam sooner than previously thought.

The business conditions index (an aggregation of trading

conditions (sales), profitability and employment) fell in

October, to +6 index points (from +8), its lowest level

since May 2015. The business confidence index also

fell to +4 index points (from +6) in October.

According to Mr Oster, NAB’s Chief Economist, “we are

becoming a little more concerned about some of the

trends we are starting to see in the Business Survey.

While conditions are still at above average levels, if the

recent trajectory continues we could be looking at an

economy that is rapidly losing momentum. In fact, we

are clearly more concerned than the RBA about the near

term outlook. In addition to that, business confidence is

also back below average levels. That will need to change

if the RBA hopes to see their anticipated recovery in non-

mining business investment.”

Business conditions continue to look quite varied across

the major industry groups in the survey. “While there

was some narrowing in business conditions between

non-mining industries in the month, this was partially

the result of deterioration in conditions for the best

performing (services based) industries. There was,

however, a noticeable improvement in retail conditions,

although the trend remains quite soft” said Mr Oster.

Within business conditions, both trading and employment

conditions deteriorated – although the former remains

elevated – while profitability was steady. “Softer

employment conditions are a concern, particularly with

the index now threatening to drop back into negative

territory. Any further weakening would suggest future

employment growth that is inadequate to prevent a

deterioration in the unemployment rate”, said Mr Oster.

Meanwhile, the survey’s leading indicators of near-term

business activity were also less encouraging this month.

In particular, forward orders dropped sharply to zero, the

first time the index has not been positive since March.

Capacity utilisation rates, which are relevant to future

employment and capital expenditure growth, continued its

recent decline as well. According to Mr Oster, “both of

these trends suggest some risk to both the near-term

outlook and longer-term economic prospects. Although

with that said, we have continued to be pleasantly

surprised by the strength in the Survey’s capex indicator”.

NAB’s capex indicator at +7 index points is more upbeat

than other investment indicators.

“The recent moderation in some NAB Business Survey

indicators is a concerning trend that warrants close

monitoring, but our assessment is that the deterioration

to date is not (yet) enough to warrant a significant change

in the outlook”, said Mr Oster. “However, if the recent

trends were to continue, it would be unsettling and imply

that the non-mining recovery has started to run out of

steam earlier than expected. For now though, we would

only be looking to slightly lower 2017 forecasts and

remain reasonably comfortable with the near-term

outlook, which is expected to be supported by commodity

exports and the housing construction cycle. That said we

are clearly more concerned than the RBA about the near

term outlook. Beyond the near-term, impetus from those

growth drivers will fade which will see the economy slow

into 2018. Two more 25bps rate cuts are still expected

from the RBA next year in response to ongoing low

inflation and a more subdued growth outlook”. NAB’s

latest Australian economic forecasts will be available on

Thursday.

NAB Business Survey: Slowing

Alan_Oster@national.com.au / Riki.Polygenis@nab.com.au /

James.Glenn@nab.com.au

Trading Profitability Employment Conds 1990s recn Conds GFC

Current

5yr range

Seasonally adjusted Trend

ABS % p.m. trend (LHS) NAB trend net bal. (RHS)

Crude Oil Prices have weakened over the last few

weeks as US inventories spike, and the chances of

OPEC finalizing their production freeze agreement

fade

OPEC and Russian production in October were at

record highs, while US production was steady with

increasing rig count

Oil and Commodity markets are attempting to assess

the longer term implications of the Trump

Presidency, with Copper prices an immediate

beneficiary

Source: Reuters

Oil prices have continued to suffer over the last month

as the initial euphoria of the OPEC production freeze

agreement from Algiers from September has eroded.

There are serious doubts that OPEC can agree exactly

how to share the burden of the cuts with Nigeria, Libya,

Iran, Iraq all wanting to be excluded while they look to

increase production from low levels. Any agreement will

require the Saudis to shoulder the bulk of the cuts, while

the others would benefit from any increase in price, this

seems to be a unpalatable scenario for the Saudis.

In the absence of any OPEC agreement, global production

levels look set to continue to increase and support the

current oversupply condition. OPEC pumped crude at a

record high 34 million bpd in Oct, well above the 32.5 m

bpd cap agreed in Algiers. Russia is also pumping at 11.2

m bpd, having increased production by 5% over the last

few months – however they have indicated a willingness

to match any OPEC freeze. US inventories increased last

week by a record 14 million barrels and a further 2.5

million barrels this week all of which is keeping prices

pressured.

Of course the recent Trump presidential victory is having a

major impact on commodity prices. Copper has rallied

10%, as the market assesses the impact on construction

related raw materials demand from Trumps proposed

infrastructure strategy – this should also support steel,

zinc and nickel prices. However oil may be pressured by

a relaxation of environmental compliance (roll back of

emission reduction targets and pull out of Paris accord)

and a drive to increase local US production (removing

drilling restrictions in Alaska and the Gulf). This may be

slightly offset in the short term by the possible back

tracking of Iran sanctions removal, potentially restricting

Iran’s production again.

Oil charts have swung bearish also, and indicate spot

crude prices will likely return to wider US$ 38-53 price

range, with previous bullish targets above $60 invalidated

for now.

Spot Singapore Gas Oil

nigel_a_collins@bnz.co.nz

Commodity US$

Change

(daily US$)

Change

(Fortnight)

Change

(Month)

Change

(Year)

Brent Crude 46.70 0.67 -6.38% -9.92% -4.30%

WTI Crude 45.41 0.43 -7.65% -9.47% -1.41%

Copper 5,400 183.80 13.94% 11.78% 4.02%

Zinc 2,476 10.90 6.04% 7.04% 49.88%

Aluminium 1,752 25.36 4.65% 4.10% 12.31%

Tin 21,331 -294.87 3.55% 6.26% 35.31%

Nickel 11,531 321.20 12.76% 13.58% 16.26%

Carbon and Commodities

Trump’s election victory was a surprise. Our long-

standing assumption had been a Clinton victory.

That said, our projections embody a stronger USD

outlook and at first glance the Trump factor adds

weight to that view. We maintain our NZD forecasts

of USD0.72 for end-2016 and USD0.67 for end-2017.

Trump’s economic policies are more inflationary than

the Clinton alternative, driven by more expansionary

fiscal policy. This adds to the chance of tighter US

monetary policy and a stronger USD. A possible

change to taxing offshore company profits could also

support the USD.

Trump’s trade policy is the biggest concern for the

US economy and USD. We’re hopeful that trade

policy is only tweaked rather than over-hauled,

and in the meantime treat this as only a risk factor

for the USD.

After much anticipation by the market over recent weeks

and months one of the big risk events of the year – the US

election – is now out of the way. That said, the election

hasn’t really reduced the level of uncertainty about the

outlook. The Trump victory was very much unexpected

by the market and our central forecasts have long

assumed a Clinton victory. Where to now?

Trump’s election platform was crystal clear but the

uncertainty now relates to the implementation phase of

policy. Questions are will Trump tone down the policy

rhetoric now that he is President-elect and how much

sway will his fellow Republicans have in changing policy?

Will Trump go for the jugular and aim to tick off all of his

key policies, or will he take a more targeted approach and

put more emphasis on some, at the expense of others?

These are important questions to address but for which

no answer can confidently be given. Now is not the time

to make bold calls but we consider the risk around our

current NZD view stemming from the US election.

US monetary policy on a firmer track

The core assumption of our FX forecasts has been a

positive USD outlook. It is centred on the view that the

Fed hikes interest rates in a world where other major

central banks, including NZ, are either still easing policy

(via quantitative easing) or keeping policy unchanged.

Market pricing post-election, ignoring the initial knee-jerk

reaction, has moved towards slightly increasing the

chance of the Fed hiking in December and next year.

This has supported the USD post-election.

We agree with this assessment. It reflects Trump’s

expansive fiscal plans, centred around tax reform,

including significant tax reductions, and increased

infrastructure spending. More stimulatory fiscal policy

will inevitably lead to greater inflationary pressure.

We think that fiscal policy will be much more stimulatory

under a Trump presidency than it would have been under

Clinton. The big sell-off in long US Treasury rates

overnight is consistent with this view.

The other USD-positive development relating to US

monetary policy is that Trump has the opportunity

to appoint two hawks to the Federal Reserve Board

to occupy the current vacant Governor positions.

This would tilt the balance of voting members of

the FOMC towards a more hawkish bent.

Change to taxing offshore profits

One of Trump’s fiscal bugbears was that US tax policy

encouraged US corporates to keep their offshore profits

offshore. A widely accepted estimate is that USD2.4

trillion of accumulated profits of large US corporates is

held overseas. Trump advocates a one-off repatriation

tax of 10% and a lower tax rate going forward that would

reduce the incentive for companies to hoard cash

overseas and bring it back to the US instead.

The implication of this policy for the USD is positive to

the extent it will encourage spending in the US economy

as the funds return. Some of current accumulated profits

will be held in non-USD currencies, potentially adding to

the demand for USD when the funds are transferred.

Estimates of the latter are hard to pin down, but would

likely be in the order of hundreds of billions than into

the trillions.

Trade policy a risk to the USD

Trade policy is the key concern regarding Trump’s agenda.

We know of no countries that have gotten richer by

putting up trade barriers so hopefully Trump’s suggested

punitive 35-45% import tariffs on Mexico and China

imports will never see the light of day. Restricting trade

policies and “keeping jobs in America” was a key policy

Trump campaigned on, but there might be softer ways of

ticking this box off than the destructive policies proposed.

The circa 8-10% depreciation of the Mexican peso against

the USD since Trump got the Republican nomination

should give him pause for thought before hastily going

down this trade policy path. One might say that the threat

of such a policy has already increased the attractiveness

of US factories relocating to Mexico, the opposite of what

Trump desires. We can imagine a number of CEOs of US

corporates already lobbying key Republicans to avoid

going down this destructive path.

If common sense prevails, then US trade policy might

only be tweaked, rather than over-hauled. Trump’s trade

policy increases the risk of an economic downturn, with

downside risk to the USD. Until the new government’s

intentions are made clearer, we’d rather treat US trade

NZD: Trump Win USD-Supportive

policy as a risk to our forecasts than embodying it into our

central track.

No change to forecasts at this point

The bottom line is that despite being side-swiped by a

different election result than anticipated, we are not

inclined to rush in to change our FX forecasts. The USD

might even turn out to be more positive than previously

anticipated, although this assumes that the destructive

trade policies proposed are much watered down over the

course of time. That means an unchanged year-end target

for the NZD of USD0.72 and a modest depreciation

through next year, to a low of USD0.67 in the second half.

The US Presidential election might be now out of

the way, but markets are likely to remain on edge as it

contemplates a different US outlook. We will be keenly

watching the make-up of Trump’s Cabinet and team of

advisors. These might provide some clue as to the

direction of policy once Trump is inaugurated on

20 January.

On the economic front, we’ll be monitoring the first post-

election indicators on business and consumer confidence

to see if the US economy remains on track. There were

questions around whether investment and spending plans

had been put on hold before the election. We’ll soon see,

but until we get some concrete policy proposals, the

uncertain outlook with a new President could well

continue to hold back spending plans.

US inflation pressures increasing

One thing that has been clear is the signs of rising

inflation pressure in the US that sets the Fed on course to

deliver its second tightening of the cycle in December,

one year after it all began. It would take a bout of market

turbulence over coming weeks to hold back the Fed now,

it seems.

US Inflation Pressures Increasing

Underlying our view that NZD/USD depreciates next year

is that the market is complacent about the prospect of

further Fed tightening next year. The US OIS market prices

in just over 40bps of tightening through to the end of next

Our US Rate Forecasts Align With FOMC, Not Market

year. Our view is more in line with the median FOMC

member, which suggests more like 75bps of tightening.

Any “surprise” tightening by the Fed would affect the NZD

via two forces. Firstly, the likely direct positive impact on

the USD. And secondly, a likely fall in global risk appetite

as some angst returns from the effective tightening in

global financial conditions and their impact on emerging

markets, commodities and so on.

Another risk factor for the NZD we have our eye on is

inflation in China. China PPI inflation has turned around

significantly over the past nine months, from deflating

around 6% y/y to price gains now in excess of 1% y/y.

This is backed up by anecdotal evidence of factories in

China facing rising cost pressures, with a weaker yuan

and rising labour costs no doubt contributing.

China Inflation Correlates With World Inflation

Historically there has been a good link between China

PPI inflation and CPI inflation in the major developed

economies. A continuation of this trend would see global

inflation pressures increase. This would lead to much

higher global bond rates and a risk-off environment,

putting downward pressure on the NZD, consistent

with our outlook.

jason.k.wong@bnz.co.nz

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Source: BNZ, Bloomberg

Average hourly earnings

Core PCE Deflator

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Fed Dot Plot vs Market Pricing

Source: BNZ, Bloomberg

Change in Fed Funds rate relative to current rate (bps)

FOMC Projection as at Sep-2016 Current market pricing

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World CPI vs China PPI Inflation

CPI* y/y%

China PPI y/y%

Source: BNZ, Bloomberg

* Average CPI of US, EA, JP, UK, CA

Long NZD positions

– In the last week, the model has moved to a long

position in NZD/USD, NZD/AUD and NZD/EUR, while

maintaining the long NZD/JPY position. The short

NZD/GBP position in play over the past couple of

months was closed for a circa 4% return.

USD positions changed

– Yesterday’s choppy trading conditions saw some

fresh USD positions opened up but we’d ignore

these, given the unusual market circumstances the

long USD/CAD position has been maintained.

jason.k.wong@bnz.co.nz

FX Momentum Model

BNZ Foreign Exchange Momentum Model

Our momentum model is used primarily as an indicator

of speculative account activity, as opposed to a trading

tool. The model provides some indication of the levels at

which speculative accounts may be entering into long or

short positions in the major currencies. It can also

provide a steer on how basic trend following/momentum

accounts are positioned.

The basic trading algorithm our model uses is as follows:

1. Buy if the price breaks above recent ranges, or sell if

it breaks below recent ranges.

2. In exiting a position, the model uses a trailing stop.

The stop is set at the previous10-day high or low, but

with an additional adjustment factor that sets a wider

stop when markets are more volatile.

Together, these two conditions constitute the core of

any momentum model, whose central premise is that a

break outside of a range indicates that the price will

continue in the direction of the break. A couple of extra

conditioning filters have been added to our momentum

model to try to stop the model reacting to false breaks.

9-Nov-16 (as at New York Close)

Currency pair Position Entry date Entry level Mkt Return Stop

Long

trigger Short trigger

NZD/USD Long 03-Nov-16 0.7310 0.7279 -0.4% 0.7188

NZD/AUD Long 03-Nov-16 0.9549 0.9534 -0.2% 0.9391

NZD/EUR Long 07-Nov-16 0.6645 0.6672 0.4% 0.6471

NZD/GBP Neutral 09-Nov-16 0.5820 0.5867 0.6111 0.5747

NZD/JPY Long 19-Oct-16 75.06 76.92 2.5% 74.46

AUD/USD Long 08-Nov-16 0.7734 0.7635 -1.3% 0.7600

AUD/JPY Long 07-Nov-16 80.64 80.68 0.0% 78.48

DXY Short 09-Nov-16 96.89 98.50 -1.7% 99.03

EUR/USD Long 09-Nov-16 1.1145 1.0910 -2.1% 1.0875

GBP/USD Neutral 02-Nov-16 1.2332 1.2406 1.2557 1.2083

USD/JPY Long 09-Nov-16 105.53 105.67 0.1% 102.55

USD/CHF Short 02-Nov-16 0.9729 0.9845 -1.2% 0.9871

USD/CAD Long 21-Oct-16 1.3313 1.3424 0.8% 1.3286

Notes: This portfolio represent hypothetical, not actual, investments. Reported returns do not include the cost-of-carry.

All trades are entered and exited at triggered levels

FX Momentum Model Positions

Now that the trough in the NZ OCR cycle appears to be in place the market has begun to look ahead to the next hiking

cycle. It now prices the first OCR hike by H1 2018.

The market still prices some potential for the RBA to cut. It prices a 25% chance of a 25bps cut within the year ahead.

As we move toward the end of the year the market now prices an 85% chance of a Fed hike in December this year.

It also prices that the Fed funds rate will be approaching 1.25% by July 2019.

Finally, the market now prices little chance of further rate cuts from either the Bank of England or ECB. But, equally it

is not pricing a hiking cycle within the coming year or so.

kymberly_martin@bnz.co.nz

New Zealand United States

Australia Eurozone

United Kingdom

Cross Country

1.0

1.5

2.0

2.5

3.0

3.5

4.0

Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Jan 19

Current

27-Oct

Source: Bloomberg

%

Market Expectations

Market expectations (from OIS rates)

Expectations for RBNZ Cash Rate

0.0

0.5

1.0

1.5

2.0

Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18 Jan 19

Current

27-Oct

Source: Bloomberg

%

MarketExpectations

Market expectations (from Fed Fund Futures)

Expectations for Fed Funds Rate

0.0

0.5

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

1-Feb-11 3-Jul-12 3-Dec-13 8-Apr-15 3-Aug-16 6-Dec-17

Current

27-Oct

Source: Bloomberg

%

MarketExpectations

Market expectations (from OIS rates)

Expectations for RBA Cash Rate

-0.6

-0.4

-0.2

0.0

0.2

0.4

0.6

0.8

1.0

1.2

Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17

Current

27-Oct

Source: Bloomberg

%

MarketExpectations

Market expectations (from OIS rates)

Expectations for ECB Cash Rate

The BNZ OIS-ter: Looking Ahead

0.0

0.2

0.4

0.6

0.8

1.0

1.2

1.4

1.6

Jan 11 Jan 12 Jan 13 Jan 14 Jan 15 Jan 16 Jan 17 Jan 18

Current

27-Oct

Source: Bloomberg

%

MarketExpectations

Market expectations (from OIS rates)

Expectations for BoE Cash Rate

-1.0

0.0

1.0

2.0

3.0

4.0

5.0

6.0

Feb 11 Feb 12 Feb 13 Feb 14 Feb 15 Feb 16 Feb 17 Feb 18 Feb 19

NZ (curr) AU (curr) US (curr)

EU (curr) UK (curr)Source: Bloomberg

%

Market Expectations

Market Expectations (from OIS and FFR)

At the OCR Low

NZ 2-year swap close to ‘fair value’

Further upward pressure on mid-curve rates

NZ 2y10y curve now likely to trade up to 100bps

10-year swap spreads wider, but still targeting 35bps

Strategically, look for wider NZ-AU 2y spreads

The past 24-hours have marked a low point; for more

reasons than one. But let’s start with the RBNZ. True to

its word the Bank cut the OCR this morning, to 1.75%.

We believe this will mark an historic and cyclical low.

The Bank’s accompanying statement implied a fairly

neutral bias; “Our current projections and assumptions

indicate that policy settings, including today’s easing, will

see growth strong enough to have inflation settle near the

middle of the target range.” The Bank’s published OCR

track, which flat-lines at 1.7%, implies a 20% chance of a

further OCR cut. This was confirmed by Governor Wheeler

in his accompanying press conference.

Overall the Bank discussed myriad risks to both sides

(see main article). Near-term, it still seems marginally

more likely the RBNZ might cut than hike, though it would

be reluctant to do so. The market is now pricing a first

OCR hike by H1 2018. This is aligned with our own

forecasts. We expect the OCR will be sustained at 1.75%

throughout next year, before a gradual hiking cycle takes

hold in H1 2018.

NZ Short-End Yields

Consistent with this view, we see NZ 2-year swap (circa

2.25%) as close to ‘fair value’. We continue to believe it is

too early to fear a prolonged surge higher in short-end

yields. ‘Fear-driven’ hedging of short-end rate risk that

could push swaps well above ‘fair value’ is some way off.

That would likely require front-page discussion of

impending OCR hikes. Rather, a 2.10%-2.35% range for

NZ 2-year swap seems plausible in coming months.

NZ 2Y Swap Currently Close To ‘Fair Value’

We continue to see the mid-curve (3-5-year) as more

vulnerable to upward pressure over the medium-term, as

the market reassesses the outlook for the OCR over the

full cycle and further rises in offshore yields exert some

upward pressure.

Our forecasts see the OCR reaching 3.75% in this cycle.

Despite recent moves higher, the NZ swap curve is

consistent with an OCR that does not get above about

2.75-3.00% in this cycle. It was interesting to note the

RBNZ today suggested it still sees the ‘neutral’ cash

rate around 4%.

A Steeper NZ 1y3y Curve

The NZ 1y3y curve has now steepened to more than

35bps over the past six weeks, and is now above late-

2015 highs. As previously discussed, over the medium-

term we continue to see a move above 50bps.

Long-End Yields

Next the US election results. It is too early to make any

thorough analysis of the implications. However, we have

nudged higher the mid-point of our expected trading

range for US 10-year yields, for the months ahead, given

a higher starting point. We now see yields potentially

trading a fairly wide range of 1.75% to 2.25% around a

2.0% mid-point (previously a 1.6-1.9% range around a

1.75% mid-point).

Any further rise in US long yields will however, be limited,

by spreads to offshore counterparts. For example the

recent sell-off in US Treasuries has widened US-GE, US-

UK and US-JP yield spreads. In particular, US-GE 10-year

spreads, at 180bps, are close to historic highs. The search

for yields will not allow these spreads infinite elasticity.

These revised projections for US yields imply a slightly

higher range for NZ 10-year yields and a steeper curve.

We see a 175-2.25% range on US 10-year yields as

consistent with a 2.90%-3.30% range on NZ 10-year

swap. We maintain our view of a steeper NZ 2y10y curve.

1.0

1.5

2.0

2.5

3.0

3.5

4.0

4.5

5.0

Jan 09 Jan 11 Jan 13 Jan 15 Jan 17

NZ 2-year swap Overnight Cash RateSource: BNZ

(%)

F'csts

1.0

2.0

3.0

4.0

5.0

6.0

7.0

8.0

9.0-1.2

-0.7

-0.2

0.3

0.8

1.3

1.8

Jan 01 Jan 04 Jan 07 Jan 10 Jan 13 Jan 16

NZ 1y-3y curve

NZ OCR (rh)

Source: Bloomberg

%

F'cst

% (inverse)

Interest Rate Strategy: A Low Point

However, we suspect this may now trade toward 100bps

in the months ahead as we have exceeded our previous

target of 80bps.

US 10-Year Yields Remain Key Driver Of NZ 2y10y Curve

NZ Swap Spreads

At present, the direction of NZ swap and NZGB yields

are being driven by the same global and domestic forces.

The rise in global yields has contributed, along with strong

domestic data that has seen RBNZ rate cut expectations

reined in.

We continue to see strong fundamental supports for

NZGBs. However, in the current global backdrop, the

NZDMO’s next nominal bond tender (next Thursday) will

provide a useful test of this view. Our NZGB2027s ASM

widening position remains open. We have raised the stop

to the entry level of 13bps, and lowered the target exit to

35bps (currently 24bps).

Swaps Spreads Have Rebounded From Range Lows

NZ-AU Short-End Spreads

We believe NZ-AU short-end spreads offer the potential to

express a strategic view. i.e. that the RBNZ has this week

completed its easing cycle, while the RBA may need to

deliver further cuts next year. Our NAB colleagues see

50bps of cuts in the latter part of 2017 in order to head-off

slowing growth momentum into 2018.The market under-

prices this risk. It currently prices only around a 40%

chance of one 25bps cut next year.

We would look for a move below 40bps on NZ-AU 2-year

swap spreads to position for initial widening out to 70bps

(early-2016 highs). Further out, we expect the RBNZ to

begin its next hiking cycle someway ahead of the RBA.

This could see the RBNZ-RBA cash spread widen from

25bps currently, to above 100bps in 2018. We expect

short-end swaps to anticipate these moves. NZ-AU 2-year

swap spreads should also ultimately widen beyond

100bps.

Wider NZ-AU 2Y Spreads Ahead

kymberly_martin@bnz.co.nz

1.0

1.5

2.0

2.5

3.0

3.5

4.0

0.0

0.5

1.0

1.5

2.0

2.5

Jan 2009 Jan 2011 Jan 2013 Jan 2015 Jan 2017

NZ 2-10s swap US 10y bond yield (rh)

(%)

Source: Bloomberg

F'csts

(%)

0

10

20

30

40

50

60

70

Jan 12 Jul 12 Jan 13 Jul 13 Jan 14 Jul 14 Jan 15 Jul 15 Jan 16 Jul 16 Jan 17

NZGB23s Asset Swap Margin NZGB27s Asset Swap MarginSource: Bloomberg

bps

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

Jan 00 Jan 02 Jan 04 Jan 06 Jan 08 Jan 10 Jan 12 Jan 14 Jan 16 Jan 18

NZ-AU cash rate differential NZ-AU 2-year swap spreadSource: BNZ

Forecasts

%

Building Consents (Sep) – 31 October

It wasn’t obvious from the 0.2% increase in September’s

new dwelling consents, but the trend in building consents

remains clearly positive. September’s levels were up

13.8% on a year ago. Non-residential consent values were

17.8% down on a year prior, but this essentially reflected

unusually high levels for the corresponding period last

year rather than any particular softness this year. The

levels are solid.

Positive Trends

ANZ Business Survey (Oct) – 31 October

The economy is booming yet there’s still no sign of

inflation. That was the message – yet again – from this

survey. Indicative of such was confidence at +24.5 and

own activity expectations at +38.4 in October. While

these were marginally lower than the previous month,

they remain miles above their long term averages of

+10.9 and +27.4 respectively. Inflation expectations

were steady at 1.44%.

Credit Aggregates (Sep) – 31 October

The monthly stock of household credit expanded a

seasonally adjusted 0.8% in September – unruffled from

its pace of prior months. This made for a net expansion of

8.8%, or $19.6b, over the past 12 months. Housing credit

grew 9.2% y/y. No sign of a LVR-induced slowdown there,

despite lots of talk of such and some hints of it in other

housing indicators such as sales activity since the latest

restrictions were announced in July. More broadly, private

sector credit growth is now ‘overtaking’ that of internal

deposits. Elsewhere, agriculture credit growth has slowed

to 4.0% y/y while general business credit expanded 7.8%

y/y, its fastest annual pace since 2009.

QV Housing Report (Oct) – 1 November

Nationwide annual house price inflation slowed to 12.7%

in October from 14.3% in September. It’s difficult to see it

as a trend though, when the price index increased 3.3%

over the latest 3 months. And this entailed a quarterly rise

in Auckland values of 5.3%, even though its annual rate of

inflation, technically speaking, eased to 13.8% from

15.0% in September.

GDT Dairy Auction – 2 November

Dairy prices rocketed higher at this auction, as milk supply

declines in many key areas around the world and poor

spring weather dented the NZ production outlook. The

GDT Price index rose 11.4%, including a stunning 19.8%

lift in wholemilk powder prices to an average price of

US$3,317/T. Dairy prices have moved beyond recovery

and are now bordering on strong. The large international

price gains have lifted domestic milk price prospects.

We increased our 2016/17 milk price forecast to $6.00 per

kilogram of milksolids (from $5.30 previously).

Labour Market Reports (Q3) – 2 November

Whichever way you look at it, the September quarter

labour market data were extremely strong. But there is

still no sign of accelerating nominal wage inflation.

The 1.4% quarterly increase in employment made a

mockery of those looking for a technical correction from

the previous quarter’s 2.4% gain. The recently redesigned

survey may mean the 6.1% annual employment growth

overstates reality, but you could take a percent or two off

the headline and it would still be very strong. Even with a

jump in the participation rate from 69.7% to 70.1%, the

unemployment rate still managed to fall to 4.9%, its

lowest level since 2008 (and down from 5.0% in the

previous quarter). Despite the clear tightening in the

labour market, it has simply not yet created nominal

wage pressure. According to the Labour Cost Index,

private sector wage rates grew 0.4% for the quarter,

1.6% for the year.

Labour Market Tightening

Survey of Expectations (Q4) – 2 November

CPI inflation expectations edged marginally higher to

1.68% in Q4 from 1.65% a quarter ago at the 2-year

horizon. One-year-ahead expectations nudged up to

1.29% from 1.26%. These changes are only significant

under the microscope. But the fact they didn’t go down,

combined with an increasing likelihood that CPI inflation

will lift next quarter and the real economy is booming,

add to case that OCR cuts have come to an end.

500

1000

1500

2000

2500

3000

3500

98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Number

Monthly

Dwelling Consents

Source: Statistics NZ, BNZ

SeasonallyAdjusted

Trend

1

2

3

4

5

6

7

8

9

10

11

1262

63

64

65

66

67

68

69

70

71

86 88 90 92 94 96 98 00 02 04 06 08 10 12 14 16

% Unemployment and Participation Rates

Participation rate (lhs, inverted)

Unemployment rate (rhs)

%

Source: Statistics NZ, BNZ.

Quarterly

NZ Economic Review

ANZ Commodity Export Prices (Oct) – 3 November

The price index for New Zealand’s main commodity

exports rose 0.7% in October (in world price terms).

This added a bit more to the recent good run, with the

index now up 16.7% since a proximate low point back in

April, and 4.0% above year ago levels. When converted to

NZ dollars, the price index is up nearly 10% since April but

down 5.5% on a year ago.

On The Up

Crown Financial Statements (Sep) – 4 November

These 3-months-to-September 2016 Crown Accounts

were upbeat. Core Crown revenue for the period was

$692m (3.1%) ahead of Budget. Tax revenue was up

8.3% on the corresponding quarter a year ago. Expenses

were roughly in line with forecasts, such that the core

(OBEGAL) balance came in at a $222m surplus versus the

$503m deficit expected. It is further evidence of all that

has improved, economically, since the May Budget was

issued. On this basis, we believe the HYEFU (due 8

December) will lift its surplus track, by no small margin.

CPI Revision (Q3) – 7 November

Statistics New Zealand revised Q3 2016 inflation up to

+0.3% q/q and +0.4% y/y from the +0.2% that was

previously published for both quarter and annual inflation.

The revision was solely owing to a manual processing

error, which had over-stated the impact of the cut to

motor vehicle ACC levies. The change also lifted non-

tradeable inflation to 2.4% y/y in Q3 from the 2.1%

originally published.

Household Living-costs Price Index (Q3) – 8 November

The main purpose of these new data is to provide insight

into the inflation experiences of different household

groups. But the aggregate measure adds to inflation

indicators available. The HLPI rose 0.1% in the year to

September 2016, a bit less than the CPI likely because

of lower interest rates (that are included in the HLPI but

not the CPI).

Electronic Card Transactions (Oct) – 9 November

The value of electronic card transactions rose 0.6%

in October, on a seasonally adjusted basis. This was

arguably stronger than it looked given it followed a

very strong gain in September (+2.1%) and the lift was

relatively broad-based. Annual growth increased to 6.1%.

NZ consumers are lifting their spending with a very strong

tourism sector reinforcing the positive trend.

RBNZ Monetary Policy Statement – 10 November

The RBNZ cut the OCR 25 basis points at this meeting,

to a record low of 1.75%, as anticipated. The cut was

accompanied by a strong acknowledgment that further

cuts are unlikely to be required. For further discussion on

this please see the lead article in today’s Strategist.

doug_steel@bnz.co.nz

80

100

120

140

160

180

200

220

240

260

280

300

320

340

360

1986 1988 1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016

ANZ NZ Commodity Prices

NZD Prices

World Prices

Source: ANZ Monthly

Index, July 1986=100

BNZ Manufacturing PMI (Oct) – 11 November

September’s PMI kicked right back up to 57.7, having

slowed to 55.2 in August, although not without some

fraying at the edges. October’s PMI could give up a

point or two and still be well above its long-term

average of 53.2.

Food Price Index (Oct) – 11 November

We anticipate a 0.6% fall in October’s Food Price Index,

largely driven by a seasonal decline in vegetable prices.

Despite expected lower food prices in October (and in Q4

as a whole), the CPI overall is expected to rise 0.4% q/q

in Q4 and 1.3% y/y.

BNZ Services PMI (Oct) – 14 November

The PSI tempered to a middling 54.1 in September from a

very strong 57.9 in August. October’s result will help us

better judge whether some trend slowing over recent

months has continued or not.

REINZ Housing (Oct) – 14 November

Most interest here will be to try and deduce any

influences from the latest LVR restrictions. But, really,

it is likely many more months’ data will be required to be

confident of any trend change. Sales activity in October

seems likely to remain below last year, but still be at a

healthy level. Annual house price inflation could well

edge higher, as last October’s price dip (on other policy

changes at the time) drops out of the annual calculation.

Retail Trade (Q3) – 15 November

We have a 0.8% gain in the spreadsheets for Q3 retail

volumes, given the nominal spending indicators and

what looks to be, from the CPI, lower retail pricing in the

quarter. It is easy to imagine even more sales growth

given the likes of the tightening labour market, strong

housing market, and booming tourism but we are wary

that the previous quarter’s sales growth (+2.3%) was the

strongest in nearly 10 years. While this could technically

hold back Q3 growth, it is unlikely to deny what looks to

be a strong sales pulse with annual volume growth

expected to exceed 5%.

Strong Growth Pulse

Household Inflation Expectations (Q4) – 15 November

Along with household perceptions of and expectations

for, CPI inflation, it will be interesting to see if there has

been any change to their expectations regards house

price inflation in this survey given the latest round of LVR

restrictions. In Q3, CPI inflation expectations were below

average but with hints of nudging higher, while house

price inflation expectations were above average with

hints of edging lower.

GDT Dairy Auction – 16 November

This auction follows very strong price gains at the early-

November event. Even holding on to these previous gains

would add support to a milk price of at least $6 per kilo.

At the time of writing, the indicators are constructive in

this respect.

ANZ Job Ads (Oct) – 17 November

Job Ads have posted an impressive eight consecutive

monthly gains, including a 0.3% rise in September.

It would take more than a dip in one month to deny

a very strong positive trend in labour demand.

Business Price Indexes (Q3) – 17 November

We don’t have a strong view for these price indices, with

numerous cross-currents in play. Over the quarter, we

sense some inflation pressure via higher construction

costs, while commodity prices were mixed (think dairy up,

oil down), and a materially firmer NZD exhibited some

downward price pressure. Overall, the small quarterly

price gains we have pencilled in for both producer input

and output prices would see annual inflation for both dip

back into negative territory.

ANZ-RM Consumer Confidence (Nov) – 17 November

Consumer optimism has been building consistently in the

second half of 2016, on a seasonally adjusted basis, to

well above average levels. We will see how consumers

weigh up all the influences in November. The unadjusted

reading will be compared to October’s 122.9. Although

volatile month-to-month, the series on consumers’

inflation expectations will also be worth a glance.

Happier

NZ Upcoming Data/Events

-3.0

-2.0

-1.0

0.0

1.0

2.0

3.0

4.0

00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Quarterly % change Real Retail Sales

Source: BNZ, Statistics NZ Quarterly

BNZ's Q3 forecast

80

90

100

110

120

130

140

150

02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

ANZ Roy Morgan Consumer Confidence

Seasonally adjusted

Actual

Source: Westpac, McDermott Miller, ANZ, Roy Morgan Monthly

Index

National Accounts (March Year 2016) – 18 November

These annual national accounts are, as always, a bit dated,

and will likely pass without fanfare. But we wouldn’t be

surprised to see a lift in national savings reported for the

year to March 2016, as part of the improving picture

around the current account deficit and international

investment position over that period. These accounts will

also provide updated annual benchmarks for inclusion in

the quarterly GDP statistics that are due 15 December.

Int’l Travel and Migration (Oct) – 22 November

Slowdown? What slowdown? The net migrant inflow for

the month of September jumped to 6,340 from 5,660 in

Pop!

August on a seasonally adjusted basis; setting a new

monthly record in the process. September’s pop higher

makes October’s figures all the more interesting to see.

There also appears to be no slowdown in short term

visitor number growth. Indeed, indicators for October are

even stronger than the 13% y/y pace set in September.

New Residential Lending (Oct) – 24 November

Focus on the level of these new residential lending figures

as much as any change from previous periods. New

residential lending was 10.3% lower in September than a

year earlier. Yes, some of this is likely to do with the new

LVR restrictions (new high-LVR lending fell by 16.7% y/y).

But the high base in September last year (associated with

other policy-induced changes at that time) also needs to

be borne in mind. If October’s level of new lending simply

matched that of the previous month, it would imply the

overall stock of lending is still expanding at a brisk pace.

We’ll see.

doug_steel@bnz.co.nz

-40

-20

0

20

40

60

80

95 96 97 98 99 00 01 02 03 04 05 06 07 08 09 10 11 12 13 14 15 16

Net inflow (000s)

Monthly

Net Immigration

Source: Statistics New Zealand, BNZ

Annual running total

Mthly SA Annualised

Quarterly Forecasts

Forecasts as at 10 November 2016

Key Economic Forecasts

Quarterly % change unless otherwise specified Forecasts

Jun-15 Sep-15 Dec-15 Mar-16 Jun-16 Sep-16 Dec-16 Mar-17 Jun-17 Sep-17

GDP (production s.a.) 0.4 0.8 0.9 0.9 0.9 0.8 0.8 0.7 1.1 0.4

Retail trade (real s.a.) 0.1 1.5 1.1 1.0 2.3 0.8 0.9 0.9 0.8 0.6

Current account (ytd, % GDP) -3.6 -3.5 -3.4 -3.1 -2.9 -3.0 -2.8 -2.4 -2.1 -2.2

CPI (q/q) 0.4 0.3 -0.5 0.2 0.4 0.3 0.4 0.5 0.4 0.5

Employment 0.0 -0.2 0.9 1.4 2.4 1.4 0.6 0.5 0.7 0.6

Unemployment rate % 5.5 5.5 5.0 5.2 5.0 4.9 4.9 5.0 5.0 5.0

Avg hourly earnings (ann %) 3.2 2.7 2.5 2.5 2.1 1.6 1.8 1.9 1.8 2.5

Trading partner GDP (ann %) 3.3 3.4 3.3 3.2 3.3 3.1 3.2 3.1 3.2 3.3

CPI (y/y) 0.4 0.4 0.1 0.4 0.4 0.4 1.3 1.7 1.7 1.8

GDP (production s.a., y/y)) 2.4 2.3 2.3 3.0 3.6 3.6 3.5 3.3 3.5 3.0

Interest Rates

Historical data - qtr average Government Stock Swaps US Rates Spread

Forecast data - end quarter Cash 90 Day 5 Year 10 Year 2 Year 5 Year 10 Year Libor US 10 yr* NZ-US

Bank Bills 3 month Ten year

2015 Sep 2.95 3.00 2.75 3.20 2.85 3.15 3.65 0.30 2.20 1.00

Dec 2.70 2.85 2.85 3.35 2.75 3.10 3.60 0.40 2.20 1.15

2016 Mar 2.45 2.55 2.60 3.05 2.50 2.80 3.30 0.60 1.90 1.15

Jun 2.25 2.35 2.20 2.60 2.25 2.45 2.90 0.65 1.75 0.85

Sep 2.10 2.30 1.90 2.25 2.05 2.15 2.45 0.80 1.55 0.70

Forecasts

Dec 1.75 2.05 2.20 2.80 2.15 2.50 2.90 1.10 2.00 0.80

2017 Mar 1.75 2.05 2.35 2.85 2.25 2.70 2.95 1.10 2.00 0.85

Jun 1.75 2.00 2.50 2.80 2.40 2.80 3.00 1.40 2.00 0.80

Sep 1.75 2.00 2.60 2.80 2.50 2.90 3.10 1.40 2.00 0.80

Dec 1.75 2.00 2.70 2.95 2.60 3.00 3.25 1.60 2.25 0.70

2018 Mar 1.75 2.10 2.80 2.95 2.80 3.10 3.25 1.60 2.25 0.70

Jun 2.00 2.40 2.90 3.00 3.10 3.20 3.30 1.90 2.25 0.75

Sep 2.25 2.65 2.90 3.05 3.20 3.20 3.35 2.10 2.25 0.80

Dec 2.50 2.90 3.10 3.10 3.40 3.40 3.40 2.40 2.25 0.85

Exchange Rates (End Period)

USD Forecasts NZD Forecasts

EUR/USD USD/JPY GBP/USD NZD/USD AUD/USD NZD/EUR NZD/JPY NZD/GBP NZD/USD NZD/AUD TWI-17

Current 1.0918 105.75 1.2415 0.7285 0.7644 0.6672 77.04 0.5868 0.7285 0.9530 78.73

Dec-16 1.1200 102.00 1.2600 0.7200 0.7500 0.6429 73.44 0.5714 0.7200 0.9600 77.82

Mar-17 1.1000 103.00 1.2200 0.7000 0.7300 0.6364 72.10 0.5738 0.7000 0.9589 76.62

Jun-17 1.0900 103.00 1.2000 0.6800 0.7200 0.6239 70.04 0.5667 0.6800 0.9444 74.86

Sep-17 1.0700 102.00 1.1700 0.6700 0.7000 0.6262 68.34 0.5726 0.6700 0.9571 74.25

Dec-17 1.0600 101.00 1.1600 0.6700 0.7000 0.6321 67.67 0.5776 0.6700 0.9571 74.24

Mar-18 1.0600 100.00 1.1600 0.6750 0.6900 0.6368 67.50 0.5819 0.6750 0.9783 74.84

Jun-18 1.0700 99.00 1.1600 0.6800 0.6800 0.6355 67.32 0.5862 0.6800 1.0000 75.28

Sep-18 1.0800 97.00 1.1800 0.6850 0.6800 0.6343 66.45 0.5805 0.6850 1.0074 75.29

Dec-18 1.0900 95.00 1.2000 0.6900 0.6900 0.6330 65.55 0.5750 0.6900 1.0000 75.09

Mar-19 1.1100 95.00 1.2300 0.7050 0.7000 0.6351 66.98 0.5732 0.7050 1.0071 76.08

TWI Weights

0.1097 0.0646 0.0470 0.1448 0.2199

Source for all tables: Statistics NZ, Bloomberg, Reuters, RBNZ, BNZ

* Changes to near-term US 10-year yield forecasts are preliminary and open to review

Forecasts

Forecasts December Years

as at 10 November 20162015 2016 2017 2018 2019 2014 2015 2016 2017 2018

GDP - annual average % change

Private Consumption 2.6 2.3 3.8 2.2 2.1 2.7 2.3 3.5 2.6 2.1

Government Consumption 2.3 1.8 1.5 1.3 1.1 2.7 2.0 1.4 1.4 1.2

Total Investment 9.7 3.0 8.5 6.6 3.9 10.9 3.0 7.4 7.6 4.5

Stocks - ppts cont'n to growth 0.1 -0.2 -0.2 0.3 0.0 0.0 -0.3 -0.1 0.4 0.0

GNE 4.1 2.1 4.2 3.6 2.4 4.4 2.0 3.9 4.0 2.5

Exports 4.3 5.5 3.9 2.8 3.5 3.1 6.8 3.2 3.0 3.5

Imports 7.4 2.1 5.0 4.1 3.7 7.9 3.6 3.5 4.7 3.8

Real Expenditure GDP 3.2 3.1 3.7 3.1 2.2 3.0 3.0 3.6 3.4 2.4

GDP (production) 3.6 2.5 3.5 3.0 2.2 3.8 2.5 3.4 3.2 2.4

GDP - annual % change (q/q) 2.9 3.0 3.3 2.7 2.0 4.1 2.3 3.5 2.9 2.1

Output Gap (ann avg, % dev) 0.8 0.9 1.3 1.5 1.3 0.7 0.8 1.2 1.5 1.4

Household Savings (gross, % disp. income) 2.6 1.2 4.0 4.1 3.7

Nominal Expenditure GDP - $bn 239.6 248.7 264.9 281.7 293.0 238.3 245.9 260.2 278.3 290.2

Prices and Employment - annual % change

CPI 0.3 0.4 1.7 1.9 1.9 0.8 0.1 1.3 1.5 1.9

Employment 3.2 2.0 5.0 2.2 1.5 3.6 1.3 5.9 2.3 1.6

Unemployment Rate % 5.4 5.2 5.0 5.2 5.5 5.5 5.0 4.9 5.1 5.4

Wages - ahote 2.6 2.5 1.9 2.7 3.0 3.0 2.5 1.8 2.6 2.9

Productivity (ann av %) 0.1 0.4 -1.9 0.6 0.5 0.2 0.1 -1.3 0.1 0.5

Unit Labour Costs (ann av %) 2.0 2.4 3.8 2.0 2.5 2.4 2.6 3.1 2.4 2.5

External Balance

Current Account - $bn -8.5 -7.8 -6.3 -7.1 -10.2 -7.7 -8.3 -7.2 -6.3 -9.8

Current Account - % of GDP -3.5 -3.1 -2.4 -2.5 -3.5 -3.2 -3.4 -2.8 -2.2 -3.4

Government Accounts - June Yr, % of GDP

OBEGAL (core operating balance) 0.2 0.7 1.1 1.3 1.4

Net Core Crown Debt (excl NZS Fund Assets) 25.1 24.6 24.8 23.8 22.2

Bond Programme - $bn 8.0 7.0 7.0 7.0 7.0

Bond Programme - % of GDP 3.3 2.8 2.6 2.5 2.4

Financial Variables (1)

NZD/USD 0.75 0.67 0.70 0.68 0.71 0.78 0.67 0.72 0.67 0.69

USD/JPY 120 113 103 100 95 119 122 102 101 95

EUR/USD 1.08 1.11 1.10 1.06 1.11 1.23 1.09 1.12 1.06 1.09

NZD/AUD 0.97 0.90 0.96 0.98 1.01 0.94 0.93 0.96 0.96 1.00

NZD/GBP 0.50 0.47 0.57 0.58 0.57 0.50 0.45 0.57 0.58 0.58

NZD/EUR 0.69 0.61 0.64 0.64 0.64 0.63 0.62 0.64 0.63 0.63

NZD/YEN 89.9 76.0 72.1 67.5 67.0 92.6 82.1 73.4 67.7 65.6

TWI 78.3 72.2 76.6 74.8 76.1 78.2 73.2 77.8 74.2 75.1

Overnight Cash Rate (end qtr) 3.50 2.25 1.75 1.75 2.75 3.50 2.50 1.75 1.75 2.50

90-day Bank Bill Rate 3.63 2.42 2.05 2.08 3.08 3.67 2.74 2.05 2.00 2.88

5-year Govt Bond 3.20 2.45 2.35 2.80 3.20 3.66 2.90 2.20 2.70 3.10

10-year Govt Bond 3.35 2.95 2.85 2.95 3.20 3.85 3.45 2.80 2.95 3.10

2-year Swap 3.55 2.30 2.25 2.80 3.50 3.84 2.80 2.15 2.60 3.40

5-year Swap 3.65 2.60 2.70 3.10 3.50 4.04 3.15 2.50 3.00 3.40

US 10-year Bonds* 2.05 1.90 2.00 2.25 2.25 2.20 2.25 2.00 2.25 2.25

NZ-US 10-year Spread 1.30 1.05 0.85 0.70 0.95 1.65 1.20 0.80 0.70 0.85

(1) Average for the last month in the quarter

Source for all tables: Statistics NZ, EcoWin, Bloomberg, Reuters, RBNZ, NZ Treasury, BNZ

*Changes to near-term US 10-year yield forecasts are preliminary and open to review

ForecastsActualsForecasts

March Years

Actuals

Forecast Median Last

Friday 11 November

NZ, Food Price Index, October -0.9%

NZ, BNZ PMI (Manufacturing), October 57.7

Aus, RBA's Debelle Speaks

US, Fed's Fischer Speaks

US, Mich Cons Confidence, November 1st est 87.9 87.2

Monday 14 November

NZ, BNZ PSI (Services), October 54.1

NZ, REINZ Housing Data, October

China, Retail Sales, October y/y +10.7% +10.7%

China, Industrial Production, October y/y +6.2% +6.1%

Jpn, GDP, Q3 1st est +0.2%

Euro, Industrial Production, September +1.6%

Tuesday 15 November

NZ, H/H Inflation Exp. (1yr median), Q4 +2.0%

NZ, Retail Trade, Q3 vol s.a. +0.8% +2.3%

Aus, RBA Minutes, 1 November Meeting

Aus, Lowe Speaks, CEDA Dinner

Euro, GDP, Q3 2nd estimate +0.3%P

Euro, Trade Balance, September s.a. +€23.3b

Germ, ZEW Sentiment, November +6.2

UK, CPI, October y/y +1.0%

US, Retail Sales, September +0.6% +0.6%

US, Business Inventories, September +0.2% +0.2%

US, Empire Manufacturing, November -2.0 -6.8

Wednesday 16 29 November

NZ, Dairy Auction +11.4%

Aus, Labour Price Index, Q2 +0.5%

UK, Unemployment Rate (ILO), September 4.9%

US, Industrial Production, October +0.2% +0.1%

US, NAHB Housing Index, November 63 63

Thursday 17 29 November

NZ, ANZ-RM Consumer Confidence, November 121.0

NZ, ANZ Job Ads, October +0.3%

NZ, Business Price Indexes, PPIO Q3 y/y +0.5%

Aus, Employment, October -10k

Euro, CPI, Oct y/y 2nd est +0.5%P

UK, Retail Sales vol., October flat

US, Philly Fed Index, November +8.0 +9.7

US, Housing Starts, October 1,160k 1,047k

US, CPI ex food/energy, October y/y +2.2% +2.2%

Friday 18 November

China, Property Prices, October

US, Leading Indicator, October +0.1% +0.2%

Monday 21 November

China, Leading Index (Conference Bd),

Jpn, Merchandise Trade Balance, October +¥498b

US, Chicago Fed Nat Activity Index, October -0.14

Tuesday 22 November

NZ, External Migration, October s.a. +6,340

Euro, Consumer Confidence, November 1st est -8.0

US, Existing Home Sales, October 5.47m

Last

Wednesday 23 29 November

Aus, Construction Work Done, Q3 -3.7%

Euro, PMI Manufacturing, November 1st est 53.5

Euro, PMI Services, November 1st est 52.8

US, Markit PMI, November 1st est 53.4

US, New Home Sales, October 593k

US, Durables Orders, October 1st est -0.3%

Thursday 24 29 November

NZ, Residential Lending, October y/y -10.3%

Aus, Private New Capex, Q3 -5.4%

Germ, IFO Index, November 110.5

US, FOMC Minutes, 1/2 Nov meeting

Friday 25 November

NZ, Merchandise Trade, October -$1,436m

Jpn, CPI, October y/y -0.5%

UK, GDP, Q3 2nd est +0.5%P

US, International Goods Trade, October 1st est -$56.1b

US, Markit PSI, November 1st est 54.8

US, Wholesale Inventories, October 1st est +0.1%

Tuesday 29 November

Jpn, Household Spending, October y/y (real) -2.1%

Jpn, Unemployment Rate, October 3.0%

Euro, Economic Confidence, November 106.3

US, Shiller Home Price Index, September y/y +5.3%

US, Consumer Confidence, November 98.6

US, GDP, Q3 2nd est +2.9%P

Wednesday 30

NZ, Household Credit, October y/y +8.8%

NZ, ANZ Business Survey, November +24.5

NZ, RBNZ Fin. Stability Report

NZ, Building Consents, October (res, #) +0.2%

Aus, Private Sector Credit, October +0.4%

Aus, Building Approvals, October -8.7%

US, Beige Book

US, Chicago PMI, November 50.6

US, ADP Employment, November +147k

US, Personal Spending, October +0.5%

Thursday 1 December

NZ, Terms of Trade, Q3 -2.1%

Aus, CoreLogic HPI, November +0.5%

China, PMI (NBS), November 51.2

China, Non-manufacturing PMI, November 54.0

Jpn, Capital Spending, Q3 y/y +3.1%

Euro, Unemployment Rate, October 10.0%

UK, Markit/CIPS Manuf Survey, November 54.3

US, Construction Spending, October -0.4%

US, ISM Manufacturing, November 51.9

Friday 2 December

NZ, Building Work Put In Place, Q3 vol s.a. +5.5%

Aus, Retail Trade, October +0.6%

US, Non-Farm Payrolls, November +161k

Calendar

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