In the past few years, a significant amount of economists and practitioners have warned of a potential hard landing in the Australian housing market, as property prices have been growing at unsustainable rates with first-home buyers having difficulties saving a significant deposit to get a foothold in the market. According to the Australian Bureau of Statistics, the total value of residential property in Australia is now exceeding 7 trillion USD, by far the economy’s largest asset. As there are no ‘vehicles’ to short the Australian housing market as during the US subprime crisis, two alternative ways to short the property market was through either going short the Australian Dollar or short the banks. Prior the Covid19 crisis, banks’ mortgages were equivalent to approximately 80% of the country’ GDP, with most of them piled into the top 4 banks (Commonwealth, WestPac, ANZ and NAB).
Even though house prices were starting to decline significantly in 2018 and the beginning of 2019, with investors speculating that it was the start of the ‘hard landing’, the reversal in the global stance of monetary policy (from quantitative tightening to quantitative easing) combined with the surge in Chinese liquidity have generated strong support for the Australian property market in the past year. This chart shows an interesting co-movement between China excess liquidity (6M lead), which we compute as the difference between real M1 money growth and industrial production, and the Australian housing market. It seems that the downside risk in the Aussie property market should remain limited as money growth keeps accelerating in China.
Yesterday evening, the Reserve Bank of New Zealand raised its official cash rate by another 25bps for the third time this year to 3.25%, at a time when most of the central banks have kept their base rates at or near zero. If we have a quick look at the statement, it said that inflationary pressures are expected to increase (as a reminder, CPI came in at 1.5% in the first quarter) and the central bank would like to see interest rates back to a more ‘neutral’ level as it is important that ‘inflation expectations remain contained’. The next meeting will hold on July 25th and some economists already expect another 25 bps rate hike.
With FX volatility at very low levels since the beginning of the week, we have played the typical classical carry trade strategy since Monday by holding a long position on NZDJPY ahead of the RBNZ meeting. If you have a look at the graph below, we thought that it was interesting to buy the pair between 86.80 and 87.00 for a test back towards 88.80 (s/l below 85.80). NZDJPY was helped by the spike in the 10-year yield from 4.22% (end of May) to 4.47%.
We think it is still interesting to play the Kiwi in the short term, potentially against the AUD or the EUR. AUDNZD is now approaching an interesting level, trading around its 50-day MA at 1.0844, and seems to be on its way to retest its support at 1.0800 (second one stands at 1.0780, 100-day MA). We suggest that new joiners should wait for a slight ‘bull’ correction after yesterday losses. In Australia, jobs data were a bit disappointing in May with total employment falling 4.8K (vs +10K consensus) from an upward revised 10.3K the precious month. However, full-time employment rose 22K (vs part time fell 27K) and could explain why the Aussie remains well supported against the yen (trading around 96.00) and the US Dollar (0.9400).
For the Euro, we would continue to keep a bearish view against the British pound in the days to come based on the monetary policy divergence, with a next target at 0.8030 (followed by the psychological 0.8000 level).