End of year derivative valuations improve for borrowers

The increase in interest rates over 2013 means that the 31 December 2013 valuations of borrower derivatives such as interest rate swaps will look much healthier compared to a year ago. The global economy certainly appears to have turned a corner through 2013 and this is being reflected in financial markets expectations for future interest rates i.e. yield curves are higher. As interest rates collapsed after the onset of the GFC many borrowers took advantage of what were, at the time, historically low levels. Base interest rates i.e. ignoring credit, were compelling and borrowers increased their fixed rate hedging percentages locking in swap rates for terms out to ten years. Unfortunately, as the global economy sank further into recession, interest rates fell further than most market participants expected. Consequently, derivatives such as interest rate swaps moved further out-of-the-money creating large negative mark-to-market positions.

The unprecedented steps taken by central banks in an effort to shore up business and consumer confidence, protect/create jobs and jump start lack lustre economies pushed interest rates lower for much longer. Through 2013 the aggressive monetary policy easing undertaken since 2008 (by the US in particular) has started to show signs that the worst of the Great Recession is behind us. The Quantitative Easing experiment from the US Federal Reserve’s Chairman Ben Bernanke appears to be a success (only time will confirm this). The labour market has strengthened, as well as GDP, in 2013 allowing a gradual reduction in Quantitative Easing to begin. Although the US Central Bank has been at pains to point out that the scaling back of QE does not equate to monetary policy tightening, merely marginally “less loose”,           the financial markets were very quick to reverse the ultra low yields that had prevailed since 2008.   The US 10-year treasury yield is the benchmark that drives long end yields across every other country so when bond markets in the US started to aggressively sell bond positions, prices dropped and yields increased globally. As the charts below show all the major economies of the world now have a higher/steeper yield curve than they did a year ago reflecting expectations for the outlook for interest rates. For existing borrower derivative positions the negative mark-to-markets that have prevailed for so long are either much less out-of-the-money, or are moving into positive mark-to-market territory.

Of the seven currencies that are included in the charts below, all display increases in the mid to long end of the curve i.e. three years and beyond, to varying degrees. Japan continues to struggle having been in an economic stalemate for 15-years so the upward movement in interest rates has been muted. The other interesting point is the Australian yield curve which shows that yields at the short end are actually lower at the end of the year than they were at the start of the year. Australia managed to avoid recession after the GFC, a beneficiary of the massive stimulus undertaken by China and the ensuing demand for Australia’s hard commodities. However, as China’s economy subsequently slowed and commodity prices fell, the recession finally caught up with Australia and the Official Cash Rate (OCR) has been slashed in 2013, hence short-term rates are lower than where they started the year.

As 31 December 2013 Financial Statements are completed there will be many CFOs relieved to see the turning of the tide in regards to the revaluation of borrower derivatives.

2012 to 2013 yield curve movements

Interpreting Possible Fed Taper Scenarios

The US economy slowed in the months since the idea of QE3 tapering was first floated. In light of recent price developments, we examine the case: to taper or not to taper?

The Federal Reserve’s balance sheet has jumped by over $3 trillion since the global financial crisis erupted in 2008. QE1, the first large scale asset purchase (LSAP) program was bold: it mind as well as saved the entire global economy. Just how bold? Fed Chairman Ben Bernanke won TIME Magazine’s coveted “Person of the Year” anointment in 2009.

QE2 was similarly successful, but not met without its critiques. A $600 billion bond-buying program was nothing to shake a stick at; it propelled global equity markets higher from November 2010 through June 2011, before the Euro-Zone crisis decided to wake up and the U.S. lost its ‘AAA’ rating at Standard & Poor’s for continued political brinkmanship (which continues today).

QE3 has proven to be the least effective and most controversial easing plan to date, more so than the even bolder measures taken in Japan by the government and the Bank of Japan, collectively known as ‘Abenomics.’ When the Fed announced QE3 in September 2012, market pundits were convinced that U.S. yields would plummet and the U.S. Dollar would be thrashed – more of the same of QE1 and QE2. QE3 was dubbed “QE-infinity” given its open-ended nature. But instead, with the U.S. economy improving, and yields shooting up in favor of a stronger U.S. Dollar, there’s growing support inside and outside of the Fed for a reduction in QE3.

There are several reasons to taper and not to taper, and they will be weighed by the Fed at its future meetings as the central bank eventually winds down its purchases. On the positive side, the fiscal drag thanks to the budget sequestration has proven much less daunting than previously forecasted, and the U.S. fiscal deficit is falling at its fastest rate in over 50 years. The U.S. unemployment rate is now at 7.0%, as low as it’s been since 2008.

The negatives are evident as well. Labor market growth has slowed in recent months, and Nonfarm Payrolls figures have eroded through midyear. Consumption has started to fall, and that may be a symptom of recently higher interest rates; higher borrowing costs reduce disposable income, and with wage growth dead, it is likely that higher rates remain a negative influence on the U.S. economy. These consumption fears have manifested in soft inflation figures throughout 2013.

Whether or not the Fed tapers QE3 will be determined shortly, but given the meteoric rise in U.S. yields the past several months, any outcome – even a $15B taper – could provoke a pullback. Consider that within the past six months, the U.S. Treasury 10-year note yield was as low as 1.631% on May 2, and had risen to as high as 2.979% on September 5 – over a 40% increase.

We thus suggest: if the Fed decides only on a modest taper $0B-10B/month, there is a significant scope for U.S. yields to pullback. Between $10B-20B/month, recent downside pressures in emerging markets and upside pressures in U.S. yields will remain; these will continue to manifest into further emerging market FX and high yielding FX weakness.

Chinese Growth Slows, Hurting Regional Trade Partners

Our last update on the Chinese economy expressed concerns over the future path of growth. The transition to the free market from a centrally-planned state has proven to be difficult as the government fights financial and political corruption, a growing middle class, and international pressure to liberalize its currency, the Yuan.

Chinese growth is slowing, but there’s nothing that the once frequently interventionist government is going to do about it. In part, growth slowed alongside lending activity, as the People’s Bank of China has maintained tighter monetary conditions for two main reasons: as it attempts to weed out illegal and corrupt banking practices that take place off companies’ balance sheets, “shadow banking.”

If only to consider the scope of this problem, on June, the interbank lending rate, overnight SHIBOR (local equivalent to LIBOR), rose by an astounding 578-basis points to 13.4%. In comparison, the 1-week SHIBOR rate rose by 292-bps to 11.0%; this inversion of the SHIBOR curve is a strong indication of extremely tight credit conditions. Typically, yield curves invert when liquidity is a problem; the fall of 2008 was plagued by this issue in the United States in particular.

In our last post regarding Chinese growth, we said, in a ‘tongue-in-cheek’ manner, that “There’s one major caveat to Chinese data that is truly inapplicable to any other global economic force: you just don’t know if you can trust it. Chinese data seemingly comes out of a black box, where Chinese government readings of the economy tend to outpace private sector readings, or even eclipse foreign government estimates of economic activity.”

Were those views ever vindicated: in June, the Chinese government said that so-called arbitrage transactions distorted trade figures in a manner favorable to stronger growth. From Bloomberg: “The transactions “resulted in abnormal growth in mainland-Hong Kong trade for a few months” since the fourth quarter, Shen Danyang, a Commerce Ministry spokesman, said at a monthly briefing today in Beijing. “Even if these arbitrage trades are not necessarily illegal, they are not fully compliant with regulations. That’s why the government has been concerned about this.”

As the government faces these issues and more on the way to opening up the Chinese economy even further, it’s evident that any new policies will be geared towards a more regulated, transparent economy. Accordingly, to prevent fueling a housing bubble (which is a concern now), the government is unlikely to implement further fiscal stimulus in the near-term. This has and will leave the economy weak in 2013:

China GDP

As long as Chinese growth remains in a rut, global trade will remain dampened and hopes for broader global recovery will be teeter. An ongoing concern for Australian policymakers, signs of slowing Chinese growth continue to weigh on the economy, where the Reserve Bank of Australia cut the main rate to a record low 2.50% in August.

The reasons behind the Reserve Bank of Australia’s rate cut are critically important, and are why we believe that, thanks to China, the Australian Dollar could remain under pressure in the interim.

European Growth Rebounds and Bolsters Euro Turnaround

This post will discuss the improving economic conditions that have started to emerge from the Euro-Zone. Policymakers have a difficult task of balancing a diverse regional economy marked by declining rates of production, consumption, inflation, and overall growth, all of which are exacerbated by a recently-strong Euro.

The Euro-Zone has backed away from the brink of collapse – for now. The recession that’s gripped the region since the 2Q’12 appears to be abating, with the contraction appeared to having bottomed in the first half of 2013.

Euro 10 yr bond spreads

The rebound, in its entirety, can be attributed to the European Central Bank’s efforts to reduce financial risk in the region in the summer of 2012, when it announced its outright monetary transactions (OMT) program, essentially an unlimited safety net for Euro-Zone countries facing high borrowing costs in trading markets.

Euro GDP

The Euro, with the tail-risk premium of a break up very-much diminished, has sparkled amid the turn in growth prospects. After bottoming just above $1.2000 against the US Dollar in July 2012, the Euro has spent much of 2013 trading above $1.3000, trading as high as $1.3832 on October 25. The resiliency of the Euro is commendable two-fold: first, not only due to warding off breakup threats; but also because the US yields have risen sharply thanks to the Fed’s upcoming reduction in QE3.

Euro PMI

The rebound in regional economic activity, of course underpinned by stability in peripheral bond markets, may continue through the remainder of 2013 and into early-2014, if incoming PMI data is accurate. In fact, the last time we discussed the Euro-Zone crisis, manufacturing and services PMI figures from across the region were struggling below 50, the demarcation between growth and contraction.

In February 2012, only German PMI Services showed growth, while the other seven gauges tracked (manufacturing and services for Germany, the Euro-Zone, France, and Italy, each) were contracting. Indeed, our last commentary was near the “bottom”; and now five of the eight PMI readings are in growth territory (see chart above). Further sustained signs of economic progress in the region will only further serve as a bullish catalyst for the Euro.

Going forward, political risk is what could undermine the Euro. Corruption in Spain and Italy threatens the governments (the latter especially), while record or near-record high unemployment rates across the Euro-Zone will only serve as a constant reminder as to how far the region needs to go before “recovery” can be declared. Depending on what the Fed does over the 4Q’13 – will it taper? by how much? in what increments? – the EURUSD is positioned for the time being to finish the year above $1.3300 so long as political pressures remain subdued and further signs of European ‘green shoots’ emerge.

Rate Differentials and Expected Policy Action by the RBNZ Keep the Kiwi Looking Up

Reserve Bank of New Zealand Governor Graeme Wheeler currently faces a problem. On one hand, exporters are losing their competitive edge as the New Zealand Dollar has strengthened. Industrialists have called for the RBNZ to try to keep rates pointed lower in order to weaken the currency. Certainly, ever since the Federal Reserve suggested that it might begin to normalize policy, New Zealand government bond yields have increased.

Given the implications of the Fed removing liquidity from global markets, bond markets have been under pressure. Considering that investors had piled into those assets with any yield over the past few years, these same assets – including New Zealand government bonds – have seen their yields spike higher faster than their policymakers can deal with (as seen in emerging markets).

Bond spread_NZDUSD

Over the past several months, the results of the Fed’s taper speculation have provoked the NZ-US 10Y yield to widen to their largest differentials all year. This will be important for future Kiwi strength: widening interest rate differentials are supportive of a stronger currency. The recent divergence could be due to the broader repricing of risk assets to compensate for a slower easing Fed. But domestic New Zealand data is pushing rates up higher naturally.

Rate increases_NZDUSD

Over the past three months, RBNZ Governor Wheeler has used his press conferences not to make a concerted attempt to weaken his currency but rather to highlight the optimistic points on the economy. In fact, currency swaps traders are near their most bullish on the New Zealand Dollar all year, with respect to the number of basis points priced in. If this pricing mechanism exceeds 90-bps, it will be closing in on its most bullish reading since the New Zealand Dollar peaked in the summer of 2011.

Why is this information useful for hedging? If the swaps market is pricing in future rate hikes by a central bank, it might be an appropriate time to hedge against further upside risk in the currency.

The End of the Fed’s QE and its Impact on Markets: Part 2

This is the final of two posts on the impact of the end of the Federal Reserve’s quantitative easing (QE) program on markets, and it will focus on the impact on the “carry trade,” of which the New Zealand Dollar is considered. We will examine the outcomes for a reduction in QE3 and how it might impact FX markets.

The end of the Federal Reserve’s QE3 program may be approaching fast. Market participants have become increasingly anxious as to the next direction the world’s most influential central bank will take as it measures the health of the U.S. economy.

In the previous post, we examined how speculation over the Fed’s QE3 “taper” has caused clear misalignment in two key markets: bonds and stocks. This agitation has spread across the globe and has helped provoke the early stages of a Southeast Asia/emerging markets crisis  (covered in future postings), which has done nothing short but wreak havoc on assets deemed “risky.” Similarly, the “carry trade” has suffered as a “risky asset.”

What exactly is the carry trade? Investopedia defines it as:

“A strategy in which an investor sells a certain currency with a relatively low interest rate and uses the funds to purchase a different currency yielding a higher interest rate. A trader using this strategy attempts to capture the difference between the rates, which can often be substantial, depending on the amount of leverage used.”

Returns from carry trade strategies were serial outperformers for over three decades before the global financial crisis of 2008. Data from 1971 to 2005 illustrates this point clearly enough:

Article 2 Table

Not only did the highest yielding currency basket in this case study offer the highest average annual return over this time series, but by theoretically going long basket 6 – the highest yielding basket – while shorting basket 1 – the lowest yielding basket – investors would take in an annual return of 4.35%. Risk is compensated, too: the Long 6/Short 1 basket has the highest Sharpe Ratio among the seven samples.

The carry trade hasn’t been so kind this year. A typical carry pair in the wake of the global financial crisis – the NZDUSD – hasn’t produced the kinds of returns risk-seeking investors would have hoped for. And that’s simply because of the chatter around the Fed’s tapering of QE3. The New Zealand Dollar, as the highest yielding major currency (the Reserve Bank of New Zealand maintains a key rate of 2.50%, the same as the Reserve Bank of Australia now) and member of the commodity bloc, finds itself in the crosses.

It’s clear that concerns about the Fed winding down QE3 has been bad news for the New Zealand Dollar and the carry trade. After peaking above $0.8600 in April, the NZDUSD slid to as low as $0.7727 (on a closing basis) in late-August –  greater than a -10% drop in just over one quarter.

Article 2 Graph

Why has this type of volatility returned? Higher U.S. yields have reduced the interest rate differential between the New Zealand and U.S. Dollars, and considering that once the Fed begins to exit it will be difficult for it to turn back, we can surmise that this instance of the carry trade – the NZDUSD – will struggle to find meaningful direction going forward. At this point, the only hope for any U.S. Dollar-funded carry trades is for a turn lower in U.S. Treasuries yields, and that might not happen if the U.S. economy improves and the Fed proceeds with tapering QE3.

The End of the Fed’s QE and its Impact on Markets: Part 1

This is the first of two posts on the impact of the end of the Federal Reserve’s quantitative easing (QE) program on markets. The recent iteration, QE3, is expected to slow over the next few months. This first article will examine what has happened to U.S. financial instruments and what to expect going forward.

On May 22, 2013, Federal Reserve Chairman Ben Bernanke tapped his microphone in front of a U.S. Congressional testimony and said, “If we see continued improvement and we have confidence that that is going to be sustained, then in the next few meetings, we could take a step down in our pace of purchases.”

With the first hints of ending the Fed’s most recent iteration of QE3 – a combined $85B in monthly asset purchases ($40B in agency mortgage-backed securities, $45B in outright U.S. Treasuries purchases) – a tectonic shift in global markets began. As is often the case, bond markets have led the way ever since late-May.

US Economy Improves

The blue area on the above chart highlights the performance of the S&P 500 and the U.S. Treasury 10-year note yield between May 22 (when Fed Chairman Bernanke first warned about “tapering”) and June 19 (when the Federal Reserve’s official policy statement suggested that a reduction in QE3 could occur at some point over the next several months.

The area highlighted is important because it frames the QE3 taper conversation in context of a strengthening US economy. After mid-June, US economic data started to disappoint. Ironically, this has been due to…higher yields (interest rates).

Indeed, a stronger U.S. economy prompted the Fed to look to wind down QE3, pushing up yields, which in turn caused the economy to slow down during the summer. Likewise concerns that the Fed has begun to see certain asset classes as too ‘bubbly’ – bonds in particular after the Fed has added over $3 trillion to its balance sheet over the past five years – exacerbated rising yields.

This remains a logical reaction: the largest buyer of U.S. Treasuries the past five years is suggesting that it will reduce its uptake; demand will fall and price will too as a result. Market participants have been simply front-running the Fed by selling their U.S. Treasuries holdings ahead of any official announcement.

Outside of the shaded area on the chart, there is an observable pattern: even as the S&P 500 has scrapped its way back towards all-time highs, it struggles mightily when U.S. yields move higher. Only when U.S. yields have consolidated over several days or weeks since early-July – in particular the U.S. Treasury 10-year note yield as seen on the chart – has the S&P 500 been able to advance. (This link will remain true, even if the Fed chooses not to taper; lower yields will boost stock prices.)

The consequences of the Fed’s plans to reduce QE3 have serious implications for financial markets across the world, not just in the United States. Indeed, other asset classes’ own barometers of risk – in FX markets, the “carry trade” such as the NZDJPY or NZDUSD pairs – are showing signs of increased instability.

The next post on the end of the Federal Reserve’s QE3 will focus on the impact on the “carry trade,” which the New Zealand Dollar finds itself in the crosshairs. We will examine the outcomes for a reduction in QE3 and how it might impact FX markets.

Australia’s Reliance on China Puts Aussie at Risk

The Reserve Bank of Australia cut its key benchmark interest rate to 2.75% at its policy meeting in May, underscoring the fragility of the Australian economy as it remains heavily reliant on emerging market growth for support.

Now, with rates at all-time lows, it’s a good moment to reflect on why we’re in the current predicament. After all, dovish monetary policy is only implemented when worries of an economic slowdown persist. The RBA has been cutting rates furiously since November 2011, when its main rate was 4.75%. Yet despite these efforts, the following chart raises two major concerns for Australia.

Article 8a

Over the past two years, after the AUDUSD peak near $1.1100 in the summer of 2011, the RBA began an aggressive easing cycle that continues today. Yet over this time, the AUDUSD (yellow line) has remained relatively stable – in the past twelve months, it has traded in a roughly 5% band, between 1.0100 and 1.0600.

What hasn’t remained stable has been Australia’s unemployment rate, which has shot up six-tenths of point over the same time frame. Despite several rate cuts the past few years, Australia’s unemployment rate has increased from 4.9% in April 2011 to 5.6% in March 2013, the highest rate since November 2009.

While volatile labor market readings the past several months have unnerved policy officials, such activity is likely to continue as the mining sector peaks, which according to the RBA and government officials should be this year. That’s why the chart above is concerning: the RBA has already done a great deal to help insulate the economy from a slowing China (discussed in the previous post) and yet the labor market is still suffering.

The other concern raised about the Australian Dollar is the fact that it is one of the few major currencies that offers any semblance of yield. With risk appetite buoyant in recent months, this “reaching for yield,” as Fed Chairman Ben Bernanke has described it, has pushed up the prices of Australian (and New Zealand) sovereign debt.

Article 8a

This perspective feeds back into the discussion from an earlier post on “currency wars.” Investor decisions are being altered because of non-standard monetary policies across the globe, forcing secondary policymakers and consumers (like those in Australia and New Zealand) to change their behavior.

To combat the flow into the Aussie and Australian debt, the RBA recently suggested that the high exchange rate of the Australian Dollar has become problematic: the Aussie “has been little changed at a historically high level over the past 18 months, which is unusual given the decline in export prices and interest rates.” Just like the RBNZ, the RBA is being forced to engage in a loose form of competitive devaluation by repeatedly cutting rates and talking down the exchange rate of its currency.



Year of the Snake: Not the year for strong Chinese growth

As China gets ready to overtake the United States as the world’s largest economy during the middle of the current decade, leaders have had to lead a tricky transition from a centrally-planned state to a free market. A major part of that task is to fill out the middle class that would support a consumption-based economy. But with base metal prices falling and the commodity currencies losing value in recent weeks, concerns over the Chinese growth picture have been stirred.

There’s one major caveat to Chinese data that is truly inapplicable to any other global economic force: you just don’t know if you can trust it. Chinese data seemingly comes out of a black box, where Chinese government readings of the economy tend to outpace private sector readings, or even eclipse foreign government estimates of economic activity.

One recent prominent example of this manipulation emerged in early-May when Chinese trade data showed an incongruent jump in exports despite declining orders to both Europe and the United States, China’s two largest markets. This discrepancy isn’t just our observation. According to researcher IHS Inc. via Sprott Group, “an “astounding” +92.9% jump in exports to Hong Kong, the most in 18 years, raises questions on data quality.”

Putting away our tinfoil hats for a moment, even if there’s no misinformation afoot, Chinese growth is slowing down. Presently, there are no indications from Chinese policymakers that they will try and stimulate their way out of this spell of moderation. Given recent rhetoric, it’s very unlikely that any such measures are taken at all, now or over the rest of 2013.

Article 7

The days of “ultra-high speed” growth were in the past, Chinese President Xi Jinping said in early-April. Similar sentiment was promoted by Prime Minister Li Keqiang, who has said that China may have to accept annual growth rates below +7.0% in the coming years. Recent gauges of manufacturing activity suggest that 2Q’13 growth might edge lower towards +7.5% annualized. The HSBC services PMI index fell to 51.1 in April from 54.3 in March, suggesting that the slowdown is not just limited to the manufacturing sector. If there’s one indicator that may confirm these views, it is the Chinese Consumer Price Index.

The chart above illustrates the annualized Chinese inflation rate (yellow) against annualized Chinese GDP (white). The slowdown in Chinese growth accelerated in mid-2011 once price pressures started to fall, a sign that overall demand in the economy was weakening. Now, inflation has fallen by around four percent, tracking GDP’s diminished rate of +7.7% annualized from near +10.0% just two years earlier.

While it appears that the market and policymakers are going to push Chinese growth lower, the ripples these waves will create will be exceptionally important for the global economy. Already, signs of slowing Chinese growth have negatively impacted the Australian economy, where policymakers cut the main rate to a record low 2.75% in May.

The reasons behind the Reserve Bank of Australia’s rate cut are critically important, and are why we believe that, thanks to China, the Australian Dollar could suffer in mid-2013.

Roots of the Spreading Currency War: Part 2

Quantitative easing (QE) became the preferred non-standard policy tool among central bankers starting in 2007 as more and more large central banks reached the zero interest rate policy bound and were forced to become more creative. Regardless of where you stand on the issue, it goes without saying that without the implementation of QE, the global economy would still be in tatters. 

Over the past several years, the Fed hasn’t been alone in its efforts to weaken its currency to help domestic exporters. For example, the Bank of England has expanded its monetary base by five times since 2008; the Swiss National Bank implemented a currency floor for the Swiss Franc against the Euro to stabilize trade.

In 2013, the most notable offender has been the Bank of Japan, who in an effort to pull the country out of a two decade long deflationary spiral (Japan has been (in)famously mired in a more-than-two decades long deflation spiral) has pulled the rug from under the Yen quite literally. From January 1, 2008 to November 14, 2012, the Yen had rallied by +43.21% against the British Pound; +38.14% against the Euro; and +28.97% against the US Dollar. Since mid-November, when it became clear that Shinzo Abe would rise to power as prime minister, the Yen has been ‘competitively devalued’: it lost -20.42% to the British Pound; -26.69% to the Euro; and -23.52% against the U.S. Dollar.

Article 6

Clearly there is a distortive effect by ultra-easing policies on FX markets. The effects are not limited, however, as investors’ risk tolerance is completely altered. Consider the performance of the U.S. equity market the S&P 500 (yellow) compared to the size of the Federal Reserve’s balance sheet ($M) (white). The rally in U.S. equities – the benchmark for high-grade risky assets – can be wholly attributed to the rising Fed’s balance sheet, as the chart above implies.

Now that the BoJ has engaged in QE, the Nikkei 225 stock index is soaring, up +32% in 2013 thus far. With the BoJ’s QE plans in place for at least the next two years, investors will continue to jettison Yen-denominated assets in search of yield. But this brings us back to the earlier point about trade: the weaker Yen means that major trading partners, such as the United States, the Euro-zone, and Australia and New Zealand, will have to enact counter measures to prevent their domestic exporters from bearing the pain.

On several occasions early in the year RBNZ Governor Wheeler commented that the elevated New Zealand Dollar exchange rate was hurting the nation’s manufacturers, while noting his desire to “smooth the peaks” in the high yielding currency. These efforts have been minor thus far, and yet the New Zealand Dollar is barely dislodged. There’s little reason to think the RBNZ is going to be able to turn the tides anytime soon.

If there is one thing we can expect with a fair degree of certitude, it’s that competitive devaluations are here to stay for the next several years. The Fed is doing it, the BoJ is doing it, and as time passes, more and more central banks will be forced to engage in ultra-easy monetary policy.