economics@
The global economy and the Fiji dollarThe global economy and The global economy and the Fiji dollarthe Fiji dollar
David de GarisSenior Treasury Economist
David de David de GarisGarisSenior Treasury EconomistSenior Treasury Economist
Fiji, February 2005Fiji, February 2005Fiji, February 2005
economics@
2
Today’s talkToday’s talk
l The global economy
l Outlook for major currencies and interest rates
l Australia and New Zealand: two Fiji major trading partners
l Outlook for the Fiji dollar
economics@
3
Today’s talkToday’s talk
l The global economy
l Outlook for major currencies and interest rates
l Australia and New Zealand: two Fiji major trading partners
l Outlook for the Fiji dollar
economics@
4
-6
-4
-2
0
2
4
6
8
00 01 02 03 04 05
% change from year earlier
World industrialproduction (3-mthmoving average)
OECD compositeleading indicator,4 months forward
Global growth peaked in Q3 2004 Global growth peaked in Q3 2004
World IP and the OECD leading indicator
Note: ‘IP’ is industrial production. The global PMI is constructed from PMIs for the US, Euro area, Japan, UK, Canada, Australia, HK & Singapore. Sources: OECD; Datastream; Economics@ANZ.
-6
-4
-2
0
2
4
6
8
00 01 02 03 04 05
4042444648505254565860% change from
year earlier
World industrialproduction (3-mthmoving average)
Global purchasingmanagers index
3 mths fwd (right scale)
%
World IP and purchasing manager sentiment
PMI Perhaps
stabilising
LEI rose0.2% inDec but
will keep falling in
y-o-y terms for a
whileyet
economics@
5
The US economy ended 2004 with reasonable The US economy ended 2004 with reasonable growth momentumgrowth momentum
Purchasing managers’ (ISM) index
40
50
60
70
01 02 03 04 05
Net balance (%)
Mfg growth threshold
PMI
Rose into year end but receded in Jan
Sources: Institute of Supply Management; US CommerceDepartment; Federal Reserve; Bureau of Labor Statistics.
Non-farm employment
-300-200-100
0100200300400500600
02 03 04 05
('000s)
Payroll employmentchange: 150k needed to hold U/E rate steady
Jobless claims trendinglower through Feb
Retail sales
-1
0
1
2
3
02 03 04 05
% change from previous month(excl. auto dealers and garages)
Actual
Trend
Industrial production
-1.0
-0.5
0.0
0.5
1.0
1.5
02 03 04 05
% change from previous month
Actual
Trend
economics@
6
China’s economy has slowed a bit, and lower China’s economy has slowed a bit, and lower inflation removes some pressure for higher ratesinflation removes some pressure for higher rates
Sources: China National Statistics Bureau;People’s Bank of China.
Industrial production
0
10
20
30
00 01 02 03 04 05
% ch. from year earlierActual
6-mth moving average
Money supply and bank lending
0
10
20
30
00 01 02 03 04 05
% ch. from year earlier
M2
Bank loans
Producer and consumer prices
-4
1
6
11
00 01 02 03 04 05
% ch. from year earlier
Producer prices
Consumer prices
Retail sales
05
101520
00 01 02 03 04 05
% ch. from year earlier Actual
6-mth moving average
Reflects sharp dropin food price inflation
economics@
7
Global growth outlook Global growth outlook –– more uncertainty than a more uncertainty than a year agoyear ago
United States: the mainstay China the powerhouse: slowing not stopping!
Japan: structural improvement?
Europe: lagging
-2-101234
97 99 01 03 05
% ch. from year earlier
Euro-zone
Germany
0
2
4
6
8
10
97 99 01 03 05
% ch. from year earlier
-20246
00 01 02 03 04 05
% ch. from year earlier
GDP
-4-20246
00 01 02 03 04 05
% ch. from year earlier
GDP
economics@
8
15
20
25
30
35
40
45
50
55
00 02 04 06 08 10
US$ per barrel
Spot West Texas
Int. crudeWTI futures(17 Feb '05)
Oil prices and surrounding geopolitics remains Oil prices and surrounding geopolitics remains a “thorn in the side” of the global economya “thorn in the side” of the global economy
Crude oil prices
Oil prices have averaged $28 since 1980 (in
today’s dollars)
l ANZ expects oil to average $45 this year
– which would encompass some pull-back
– OPEC is now defending $40 as a base
l Politics and oil are an ugly mix – Iraq, the Middle East and political
instability in some oil producing economies is keeping the market on edge
– OPEC is meeting demand which is holding up. OPEC is closer to capacity limits but supply disruption cannot be ignored
– the $9 average rise in oil prices this year has already cut 0.5% off world growth this year
economics@
9
Sources: OECD; IMF; Economics@ANZ.
World growth outlook
Last year started strongly but then growth easedLast year started strongly but then growth eased
0
1
2
3
4
5
6
92 93 94 95 96 97 98 99 00 01 02 03 04 05
% change from year earlier
economics@
10
Today’s talkToday’s talk
l The global economy
l Outlook for major currencies and interest rates
l Australia and New Zealand: two Fiji major trading partners
l Outlook for the Fiji dollar
economics@
11
The number one currency market issue: the US The number one currency market issue: the US current account deficitcurrent account deficit
US current account deficit and its financing
Current accountdeficit
Net equityinvestmentNet borrowing
Other
Note: ‘equity investment’ includes corporate bonds.Sources: US Bureau of Economic Analysis; Departmentof the Treasury.
Officialreserves
-200
-100
0
100
200
300
400
500
600
700
99 00 01 02 03 04
US$ bn - four quarter moving total
Net foreign purchases of US bonds and stocks
0
100
200
300
400
500
600
99 00 01 02 03 04
$bn (12-mth movingtotal)
All others
Foreign officialinstitutions
Net foreign purchases of Treasury & agency bonds
0
100
200
300
400
99 00 01 02 03 04
$bn (12-mth movingtotal)
All others
FOIs
economics@
12
The US dollar has already fallen significantly, if The US dollar has already fallen significantly, if unevenly unevenly
Real effective exchange rates
70
75
80
85
90
95
100
105
110
115
120
91 92 93 94 95 96 97 98 99 00 01 02 03 04
2000 avge= 100 30-year high (1985)
30-year low (1974 & 1980)
(Down 17% fromFeb 02 peak)
US dollar
80
90
100
110
120
130
140
91 92 93 94 95 96 97 98 99 00 01 02 03 04
2000 avge= 100
Euro (up 22% since Feb '02)
Weighted average of Asian currencies(down 3.7% since Feb '02)
Other currencies
Sources: JP Morgan; Economics@ANZ. Asian currencies areJPY, CNY, KRW, TWD, HKD, THB, MYR, SGD, IDR, PHP andINR, weighted by 2002 GDP at market exchange rates.
economics@
13
The US$ has had a mixed opening against ‘major The US$ has had a mixed opening against ‘major floating currencies’ so far in 2005 …floating currencies’ so far in 2005 …
Note: charts show daily data from 31 Dec 2003 onwards.Source: Reuters.
EUR/USD
1.151.201.251.301.351.40
31-Dec
31-Mar
30-Jun
29-Sep
29-Dec
31-Mar
US$ per € (inverted)
GBP/USD
1.7
1.8
1.9
2.031-Dec
31-Mar
30-Jun
29-Sep
29-Dec
31-Mar
US$ per £ (inverted)
USD/JPY
AUD/USD
0.65
0.70
0.75
0.8031-Dec
31-Mar
30-Jun
29-Sep
29-Dec
31-Mar
US$ per A$ (inverted)
100
105
110
115
31-Dec
31-Mar
30-Jun
29-Sep
29-Dec
31-Mar
¥ per US$
economics@
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The Federal Reserve will keep nudging rates to The Federal Reserve will keep nudging rates to “neutral” (=>3%) but on a “measured” basis “neutral” (=>3%) but on a “measured” basis
Sources: US Federal Reserve; Datastream.
US fed funds rate l Chairman Greenspan’s Feb ’05 semi-annual testimony
– the economy has entered 2005 at a reasonably good pace
– Inflation is low even with “accommodative” monetary policy
l Inflation not (yet?) a threshold policy driver for the Federal Reserve
– No doubt there are upstream commodity price pressures from oil, metals etc
– And a lower US$ could have produced more consumer inflation
– The Fed expects 1.5-1.75% for PCE inflation over 2005
02468
98 99 00 01 02 03 04 05
% paFore-cast
The Fed’s preferred inflation measure
0
1
2
3
98 99 00 01 02 03 04 05
% pa
"Core" private consumerexpenditure (PCE) price index
economics@
15
Outlook for the US$Outlook for the US$
l No doubt, the US economy, after China remains the global economy’s major growth spur and probably destination of choice
l The US budget deficit has appeared on the US Administration’s radar with promises to halve the deficit by 2009 and accelerate economic and social security reforms
l US interest rates are becoming attractive (2.5% cf ECB 2%; Japan 0%; UK 4.75%; Australia 5.25%; NZ 6.5%)
l We would not rule out one last phase of US$ decline, but we are approaching the end game of its demise; if it does decline further, a EUR/USD of 1.35-1.40 would likely be the Euro’speak; USD/JPY of 100-103 and up to 2 for the GBP
economics@
16
Today’s talkToday’s talk
l The global economy
l Outlook for major currencies and interest rates
l Australia and New Zealand: two Fiji major trading partners
l Outlook for the Fiji dollar
economics@
17
4.0
4.5
5.0
5.5
6.0
6.5
01 02 03 04 05 06
% pa
90-day bill yieldCash rate
Interest rates
The RBA has recently signalled that rates could The RBA has recently signalled that rates could rise over the next few monthsrise over the next few months
Sources: ABS; RBA; Economics@ANZ.
Inflation
RBA inflationtarget band
Falling petrol prices and a rising
A$ may force inflation
temporarily below 2% this year
The RBA’s ‘tightening bias’ will be acted on at their
March Board meeting (next
week!) and likely again in April
0
1
2
3
4
5
6
7
01 02 03 04 05 06
% pa
Excluding GST and'volatile' items
'Headline'
economics@
18
0
1
2
3
4
5
6
7
00 01 02 03 04
annual % change
Real gross domestic income
Real gross domestic product
Sources: ABS; NAB
Economic growth
The RBA thinks the Australian economy is The RBA thinks the Australian economy is stronger than official figuresstronger than official figures
1
2
3
4
5
6
7
00 01 02 03 04 05-15
-10
-5
0
5
10
15
20
25annual % change
Real gross domestic income
NAB tradingactivity
Index
Growth and NAB survey
economics@
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Sources: ABS
The labour market is very strong, with many The labour market is very strong, with many businesses reporting acute skills shortagesbusinesses reporting acute skills shortages
Employment
4.0
5.0
6.0
7.0
8.0
00 01 02 03 04 050
50
100
150
200
250
300
350%
Annual employment
growth (RHS)
Unemploymentrate (LHS)
000's
58.0
58.5
59.0
59.5
60.0
60.5
61.0
00 01 02 03 04
%
Proportion of population in employment
economics@
20
Sources: national statistical agencies and real estate institutes; Datastream; Economics@ANZ
Australian house prices rose faster than almost anywhere else in the world from 1997 to 2004Australian house prices rose faster than almost Australian house prices rose faster than almost anywhere else in the world from 1997 to 2004anywhere else in the world from 1997 to 2004
-100
-50
0
50
100
150
200
250
Ireland Australia Britain US NZ Canada Japan Singapore HK
% change, June 1997 - June 2004
Increases in house pricesselected Anglo-Saxon and Asian economies
Increases in house pricesselected Anglo-Saxon and Asian economies
economics@
21
Housing sector leading indicators stabilisingHousing sector leading indicators stabilising
Housing finance commitments
0
5
10
00 01 02 03 04 05
$ bn per month Owner-occupiers(excl. re-financing)
Investors
Residential building approvals
100
150
200
00 01 02 03 04 05
'000s (annual rate)Actual
Trend
Surprisejump in Nov & Dec: RBA taken notice
Sources: ABS; Westpac/Melbourne Institute; Economics@ANZ.
Home-buying sentiment
75100125150175
00 01 02 03 04 05
Ratio saying "good time" to saying "bad"
1st home buyer finance
1520253035
00 01 02 03 04 05
% of ex-refi total (12-mth mvg avge) average)
This series has been a good leading indicator of trends in house prices
Lower house prices are enticing 1st home buyers back into the
market
Still slowing, perhaps
economics@
22
Financial intermediaries’ lending growth showing Financial intermediaries’ lending growth showing signs of stabilisingsigns of stabilising
Source: Reserve Bank of Australia
0
10
20
30
00 01 02 03 04 05
% change from year earlier
* incl. securitizations
Housing credit*
05
101520
00 01 02 03 04 05
% change from year earlier
Other personal credit
0
5
10
15
00 01 02 03 04 05
% change from year earlier
Business credit
05
101520
00 01 02 03 04 05
% change from year earlier
Total credit
economics@
23
Household debt and debt servicing are being Household debt and debt servicing are being closely watched by the RBAclosely watched by the RBA
Sources: Reserve Bank of Australia; ABS;Economics@ANZ estimates.
60
80
100
120
140
160
96 97 98 99 00 01 02 03 04
% of annual disposableincome
Household debt to income
400450500550600650700
96 97 98 99 00 01 02 03 04
% of annual disposableincome
Household net worth to income
15
16
17
18
19
20
96 97 98 99 00 01 02 03 04
% of assets
Household debt to assets
4
5
6
7
8
9
96 97 98 99 00 01 02 03 04
% of annual disposable income
Household interest paid to income
economics@
24
3.0
4.0
5.0
6.0
7.0
8.0
96 97 98 99 00 01 02 03 04 05 06 07
-20
0
20
40
60
80
%
Unemployment Rate (LHS)
Difficulty finding skilled labour (RHS)
net balance, inverted
NZ economy: slowdown still not arriving!NZ economy: slowdown still not arriving!
Sources: ANZ National Bank, Statistics NZ
Economic growth Unemployment rate and demand for skilled labour
-1
0
1
2
3
4
5
6
96 97 98 99 00 01 02 03 04 05
GDP growth
economics@
25
80
90
100
110
120
130
140
150
160
170
90 91 92 93 94 95 96 97 98 99 00 01 02 03 04 05
July 1986=100
World prices
NZ$ prices
World commodity prices for NZ’s key commodity World commodity prices for NZ’s key commodity exports still strongexports still strong
ANZ commodity price indexANZ commodity price index
Sources: ANZ National Bank
World prices declined for the first time in 18
months in Decemberbut edged higher in Jan
economics@
26
0.45
0.50
0.55
0.60
0.65
0.70
0.75
0.80
01 02 03 04 05
10
15
20
25
30
35
40
US¢
VIX index (right scale)
Index (inverted)
A$-US$(leftscale)
Any increase in ‘risk aversion’ on the part of Any increase in ‘risk aversion’ on the part of global investors would also weaken the A$ global investors would also weaken the A$
Note: The VIX index is a measure of US stock market volatility based on prices of options on S&P500 futures. Sources: Datastream; Economics@ANZ.
Equity market volatility
0.45
0.50
0.55
0.60
0.65
0.70
0.75
0.80
01 02 03 04 05
50
100
150
200
250
300
US¢
Spread betweenyields on A-ratedcorporate and3-5 year US Treasury bonds(right scale)
Basis points (inverted)
A$-US$ (left scale)
Credit market spreads
Measures of investor risk aversion and the A$Measures of investor risk aversion and the A$
economics@
27
Interest rate spreads
0.45
0.50
0.55
0.60
0.65
0.70
0.75
0.80
0.85
0.90
01 02 03 04 05 060
50
100
150
200
250
300
350
400
450
500US¢Australia-US90-d interest
rate spread (right scale)
Basis points
A$-US$(left
scale)
0.50
0.55
0.60
0.65
0.70
0.75
0.80
0.85
0.90
01 02 03 04 05 0690
100
110
120
130
140
150
160
170
180US¢
RBA US$ commodityprice index (right scale)
2002-03 = 100
A$-US$(left scale)
Slower world growth and a narrowing rate spread Slower world growth and a narrowing rate spread to cap the A$’s rise to cap the A$’s rise
Sources: Datastream; Economics@ANZ.
Commodity prices
Traditional ‘fundamentals’ and the A$Traditional ‘fundamentals’ and the A$
Large rises incontract prices
for iron ore and coking coal will boost
this index from April ‘05
This narrowing spread trend will
continue after the RBA lifts rates in
March/ April
economics@
28
Today’s talkToday’s talk
l The global economy
l Outlook for major currencies and interest rates
l Australia and New Zealand: two Fiji major trading partners
l Outlook for the Fiji dollar
economics@
29
Outlook for the Fiji dollar (FJD)Outlook for the Fiji dollar (FJD)
Exchange rates: AUD & FJD
The Fiji dollar is pegged to a basket of currencies with the A$ having the
largest weight
l ANZ expectation of the A$/US$ breaching 0.80 in this half is coming to pass
– In part from a soft US$, but now:
– Expectations of A$ rate rises and booming commodity prices also large A$ positives
l The Fiji dollar is pegged to a basket of currencies with the A$/US$ the main key
– assuming a broadly unchanged FJD “effective” trade-weighted rate, on the above forecasts the FJD/USD could reach a peak of 0.65-0.66 by mid year
– With the FJD/AUD easing from 0.77 to 0.75 by mid year as the A$ peak ...
– ... before FJD/AUD recovering as the A$ falls later in 2005
0.3
0.4
0.5
0.6
0.7
0.8
0.9
00 01 02 03 04 05
US$
FJD/USD
AUD/USD
economics@
30
Fiji dollar cross ratesFiji dollar cross rates
FJ$ vs A$ FJ$ vs NZ$
FJ$ vs EUR FJ$ vs JPY
0.3
0.4
0.5
0.6
0.7
00 01 02 03 04 05
90
100
110
120
130
140
150
US$
FJD/USD
USD/JPY(inverted)
JPY
0.3
0.4
0.5
0.6
0.7
0.8
0.9
00 01 02 03 04 05
US$
FJD/USD
NZD/USD
0.3
0.4
0.5
0.6
0.7
0.8
0.9
00 01 02 03 04 05
US$
FJD/USD
AUD/USD
0.3
0.4
0.5
0.6
0.7
00 01 02 03 04 050.6
0.8
1
1.2
1.4
1.6US$
FJD/USDEUR/USD
economics@
31
Key FJDKey FJD--related FX rates & driversrelated FX rates & drivers
0.450.440.450.44FJD - €
0.800.780.750.77FJD – A$0.560.600.630.60FJD – US$
55.962.165.161.7FJD - ¥
5.105.305.505.33Australian 10-year bond yield (% pa)
6.006.256.506.50RBNZ cash rate
0.940.890.850.84FJD – NZ$
5.25
0.78
103
1.36
2.25
Dec 2004*
5.75
0.84
103
1.40
3.25
Jun 2005
5.75
0.77
104
1.37
3.75
Dec 2005
0.70A$ - US$
5.50RBA cash rate (% pa)
101US$ - ¥
1.26€ - US$
4.00US Fed funds rate (% pa)
Dec 2006
* actual
economics@
32
SummarySummary
l Prepare for some slowing in the global economy– Watch oil prices; uncertainty in Europe and Japan
l The Fed is lifting rates gradually to around 3-4%
l The US$ has already declined significantly– Perhaps one “final phase” of US$ decline but not enduring
l Australian and New Zealand economic growth will struggle– Two RBA rate rises are in the pipeline; maybe one from RBNZ
l Spot FJD/USD is now appreciating with the A$; this rise could continue further (a “final US$ decline phase”) but then follow the A$ down
– Under current arrangements with a managed FJD basket
economics@
The global economy and the Fiji dollarThe global economy and The global economy and the Fiji dollarthe Fiji dollar
David de GarisSenior Treasury Economist
David de David de GarisGarisSenior Treasury EconomistSenior Treasury Economist
Fiji, February 2005Fiji, February 2005Fiji, February 2005
