The whole world should heed the signal from New ZealandJohannes Röll 22 / June / 21 Visitors: 800
The New Zealand government has taken strong action this night against speculation in the housing market. This is aloud signal that everyone should heed as regulatory measures against the K-shaped welfare gap are beginning toproliferate around the world. In addition, the problems of "commodity" dollars and the decline in the yield of US bondsare confidently restoring the yen ahead of the treasury auctions.
Top Trade Topic: New Zealand Seeks To Prevent K-Divergence
The New Zealand dollar experienced a strong sell-off overnight on news that the country's government has taken aseries of measures against rising house prices. It is now clear that something like this was to be expected: this left-wing populist government was clearly outraged by the rapid rise in housing prices. Last year, after cutting the RBNZrate in response to the pandemic, housing in New Zealand became the most expensive in the OECD. The first of thecurrent measures is to empower the central bank to take house prices into account in its regulatory policy; thisaddition was discussed back in November, but was adopted at the end of February, and on March 1 it entered intoforce.
But tonight the rentier class has been hit hard by the government amending the tax code to lower the profitability ofreal estate investments and rent-seeking housing. In addition, construction on new land plots will be allowed in orderto increase the supply on the market. Among the tax amendments: capital gains will now be taxed on investmentproperties owned by the investor for less than 10 years (instead of up to 5 years, as before), and mortgage rates willno longer be reduced taking into account rental income - this is a step against buying (at least least on credit) housingfor rent.
There is a lot of movement in NZDUSD and other New Zealand dollar pairs. It is assumed that the steps of the NewZealand government will somewhat slow down economic growth and reduce the inflow of investments (necessary tocompensate for the country's permanent current account deficit). As a result, the NZDUSD pair could move below0.7000, even to the 0.6800 area, which served as significant resistance on the way up.
NZD / USDNZD / USD
But more important is the informational value of these actions. For the first time, a government has decided to directlycounter the side effects of overly loose monetary policies that benefit the rich and the rentiers, leaving behind low-income populations, especially young people, who are losing the opportunity to acquire wealth at such high assetprices. This is a serious attempt to prevent the letter K, and other countries will soon do the same. Perhaps NewZealand became a pioneer here because it so quickly overcame the pandemic within its borders.
Speaking of the K-shaped divergence: in the United States, for example, Treasury Secretary Yellen indicated that theeconomy developed in this way even before COVID-19, and then it got worse. The steps taken by the New Zealandgovernment should be our guide: other countries are likely to start corresponding reforms in taxation, economicregulation and demand stimulation soon too - after almost two generations of monetary policy and supply regulationdominance.
USD Gains Strength: The NZD sell-off sent the NZDUSD pair to a new year low, which was below the previouspronounced low in the range (0.7100). A head and shoulders pattern may appear in the AUDUSD pair if it continues tomove to 0.7620 (a breakdown of this level may take it to 0.7400). EURUSD yesterday failed to produce any significantrally, despite falling yields in the US and high risk sentiment. Therefore, it is interesting what could be the opposition tothe recovery of the dollar.
Fed Chief Powell and Treasury Secretary Yellen are reporting today and tomorrow on the CARES (Pandemic Relief) Act a year after it was passed. The text was published here and here, and nothing new and large-scale has happenedin connection with it. However, interesting turns of speech or behavior, which is especially important in the case ofYellen, can arise during the oral presentation and answering questions from lawmakers.
USDTRY: It is worth keeping a close eye on the forward rates rather than the spot level. The completely unexpectedchange in central bank governor over the weekend sparked an explosion in expected yields. This means that ingeneral it is difficult to speculate here, especially a short sale of TRY, since the strong devaluation has already beenfactored into the forward curve: the 1-month forward rate of USDTRY is 8.52 at the time of writing, while the spot rateis 7.87, which corresponds to 90% of the expected yield.
GBP is consolidating. Is it possible to see GBPUSD at 1.3500? Yesterday we noted fluctuations in the pound sterling, and now it is clearly falling against the US dollar: this morning the area of 1.3750 is in play, and the more importantlevel of 1.3500 is ahead. EURGBP short traders may be the first to return to position; we will not do anything until atleast 0.8700 is exceeded, while 0.8800 is quite possible without affecting the bearish trend.
Upcoming auctions on Treasuries and JPY: auctions on US Treasury bonds will start today (for two-year bonds), andmore important ones - tomorrow and Thursday (for five-year and seven-year bonds, respectively). The yen rises alongwith the rise of the US dollar This is a very strong dynamic and the exact opposite of the murderous situation in whichcommodity currencies are now (just look at NZDJPY, well, well!) And to some extent the currencies of developingcountries. If the US auctions are calm so that yields continue to consolidate downward by the end of the quarter(which is also the end of the Japanese fiscal year), then a steep rally in the rebound in the JPY crosses is possible.
Currency trend indicators show something new: The NZD has entered a downtrend that will intensify as the“flattening” in trend indicators makes them lag a day or two. We also note a very strong positive change in dynamics inJPY and USD, trying to establish a larger upward trend.
Johannes Röll was born 1978 in Brilon,Germany. Graduated RWTH Aachen University. Over the past ten years he worked as Head of the plastic card team, where he was mainly responsible for the development of the distribution, Head of sales Department and Financial Analyst,where he got experience in planning and support sales figures for branches. For the present he works as freelancer