Trading Places

Trading Places. In financial market circles, it’s a cultural icon, and not a day goes by when some line from the film isn’t quoted on a trading desk somewhere. When it is on Sky Movies (remarkably often), it’s like slipping on an old, comfortable shirt…always good for soaking up a few minutes of viewing, and it never fails to raise a giggle or two.

Certainly it is a more realistic portrayal of finance than the utter dross served up in BBC2’s “Last Days of Lehman” drama last night. Macro Man and Mrs. Macro could only stomach about ten minutes of it, and were forced to turn it off, gagging, as “Hank Paulson” launched into an impassioned soliloquy in the Friday night gathering of Wall Street chiefs. The dialogue was straight out of Eastenders, and Hank himself was portrayed by the same chap who was the crooked police captain in L.A. Confidential….so maybe the producers got that call right.

In any event, Macro Man has Trading Places on the mind. Last night saw the release of the altest monetary policy statement from the RBNZ, which kept rates on hold, acknowledged the uptick in the data, noted the excessive strength of the NZD, and stated that rates would be kept at current levels or lower through the end of next year. Alan Bollard subsequently offered some pretty explicit remarks that the NZD should be weaker.

Certainly the bounce in the TWI has been impressive, though it’s failed to reach prior highs. The currency is pretty clearly a concern, given the ongoing size of New Zealand’s current account deficit as a percentage of GDP. Reading between the lines, Bollard would like to tighten rates, but feels constrained by the level of the kiwi dollar. While the RBNZ has done some half-hearted intervention in the past, they’ve made no real sustained efforts to systematically weaken the NZD.

Now compare that situation with, say, Korea, where the BOK offered some fairly hawkish commentary overnight, observing that the economy should maintain momentum and that inflation should begin to pick up. This was naturally taken as a signal that rates could begin moving higher, and 1y swap rates ticked up 16 bps. Yet the scuttlebutt on the ground is that even if and as BOK hikes rates, they will seek to prevent the KRW from rising too much through the same kind of intervention that has contributed so much to the well-being of humanity over the past 6-7 years.

That the RMB hasn’t budged for well more than a year is a signal that BOK’s view is hardly unique. Somewhat unbelievably, over the past year the NZD TWI has, in aggregate, fared somewhat better than the Asian currency index (ADXY), despite the fact that NZD isn’t exactly a wonderful carry trade any more.

So on the one hand, we have a CB governor of a large c/a deficit country who’d like to tighten but won’t because of strength in his currency, which he feels powerless to counter. On the other, we have Asian CB governors who, in aggregate, oversee large c/a surplus economies that may or may not tighten policy over the next few months, but are fighting pretty damned hard against domestic currency appreciation.

Winthorpe, meet Valentine. Valentine, meet Winthorpe.

If only we could play the role of the Dukes and put Dr. Bollard in charge of, say, the BOK, and have the BOK governor manage policy in New Zealand. Perhaps then we could avoid re-inflating the global imbalance bubble that was a contributory factor to the whole mess that we’ve found ourselves in.

And maybe, just maybe, those two would cross paths at some future APEC meeting. Macro Man can just imagine how the conversation might go:

“Looking good, Billy Ray!”

“Feeling good, Louis!”