When CPI indices were revamped in 1995 by all nations, New Zealand was not only the first and the model to follow by Inflation Targets but the unique Trade Able V Non Trade Able feature inside New Zealand’s CPI allows important commentary as to what products and services offer positive and negative contributions as well as to competitive aspects to New Zealand’s overall economy. The RBNZ follows closely and mentions quite often Trade Ables V Non in monetary policy statements because both feed through to Imports and Exports and exchange rate levels.
Petrol for example as a Trade Able was + 5.3% for the quarter yet down 7.7% and 7.0% compared to March and December 2015. Yearly Petrols were down 8.1% as its total contribution to the Trade Ables component. Yearly to the June 2016 quarter , Trade Ables were down 1.5%. New Houses as a Non Trade Able was up 2.1% for the last quarter and 3.3% yearly but + 5.6% as a Non Trade Able. Cigarettes and tobacco as Non Trade Ables were up 1.5% for the quarter and 9.4% yearly as its contribution to Non Trade Ables.
Trade Ables are defined by Statistics New Zealand as “goods and services either imported or in competition with foreign goods and services in domestic or foreign markets. Trade Ables lack foreign competition and normally defined as products and services contained inside Zew Zealand’s borders for domestic consumption. Trade Ables for the quarter rose 0.6% while non Trade Ables rose 0.3%. Yearly, Non Trade Ables rose 1.8% while Trade Ables dropped 1.5%. The Non Trade Able rise explains current CPI at 0.4% as Housing, Food, Tobacco and Petrol contributed the majority and holds current CPI at its lowset 0.4% reading in 16 years. Without the rise in all products, CPI would be much lower.
Specially designed moving averages were constructed to understand since 1986 the current view into CPI as the RBNZ raised recent concerns with current levels and offered to lower OCR. Secondly, the moving average construction remains perfect in CPI averages, targets, oversold, overbought and all necessary information.
CPI at 0.4 not only trades below every average but the path to the 2% target is literally many miles and many quarters away. The 1 and 2 year averages for example are 0.85 and 1.61. Above the 2 year, every average from 2 to 10 years in successive order are located at or slightly above 2.0. The 2% target is a solid rock of massive resistance.
To move higher, CPI must first break 0.75, 0.85, 1.20, 1.61, 1.65, 1.95 then 2.00. The 1 and 2 year averages offer targets at 0.18 and 0.32. Longer term averages from 2 to 10 offer the possibility to see CPI at 1% at the best of targets. From the 3 and 4 year, CPI goes to 0.57 and 0.92 and on to the highest target at 1.10.
CPI is low and oversold so by osmosis and the rise of Trade Ables, CPI should rise slightly higher over future quarters.
Trade Ables at quarterly 0.6 in designed Moving averages trades above every average dating to 2006. The most significant point is 0.09. Yearly though at minus 1.5% offers trouble because minus 1.5 trades far below all averages. The only positive development is targets track far higher over time to positive territory.
The opposite holds true for Non Trade Ables as 0.3 for the quarter trades below every average yet the yearly level at 1.8 trades comfortably above and in no threat to break below many many quarters in the future. The two key levels are 0.70 and 0.69. The distance from current 1.8 to 0.70 is many miles.
Non Trade Ables as an index at current 1341 as well trades well above its averages and is overbought. The key level is 1305.08 then next averages at 1258.12 and 1217.96.
Trade Ables as an index is oversold as much as Non Trade Ables are overbought. At current 1049, Trade Ables are below every average and the key levels to cross higher are 1071.91, 1074.63 and 1083.41. Targets reveal the averages won’t break anytime soon.
To see CPI higher, Non Trade Ables must rise. Two aspects to the Trade Able story. New Zealand for the past two years runs a surplus of 2.9 billion. Its 3 main markets are China, Europe and Australia with Australia as currently the biggest market at 13.0 billion based on year end March 2016 data. Dairy remains the largest export but current daily volumnes remain stable while prices are dropping. The current price projection for 2016/ 2017 is 4.25 yet break even rates for the average farmer is 5.25. The price at 4.25 is down from 2014’s peak at 8.40.
Brian Twomey Inside the Currency Market, btwomey.com