RBNZ Governor says almost every currency in the world is currently declining against the US dollar

"When you see the Kiwi dollar at the moment, it is vis a vis the US dollar in terms of a declining New Zealand dollar. Almost every currency in the world is declining against the US dollar as they [the US] look to disinflate along with the rest of us," Orr said.

In a "relative" sense New Zealand is in an excellent position, Orr said.

You are seriously joking. It's in such an excellent position that the NZD ranks as the 2nd worst performing currency in the last 1, 3 month and 6 month (just behind the GBP) cycles. Overperformance indeed.

https://www.barchart.com/forex/performance-leaders?viewName=chart&timeFrame=6m 

In fact, he's 'overperforming' on a YTD basis against almost all currencies - https://www.barchart.com/forex/all-forex-markets/New_Zealand_Dollar/NZD?viewName=performance&orderBy=symbol&orderDir=asc - except the pound and the Turkish lira. Someone give this guy a raise (but definitely not in NZD)! 

Adrian has certainly left himself plenty of room to 'to do things better".

It is called the US dollar hegemony,.

Dollar milkshake theory (Brent Johnson) appears to be playing out. Everyone runs to the USD and then everyone runs from the USD!

"When you see the Kiwi dollar at the moment, it is vis a vis the US dollar in terms of a declining New Zealand dollar. Almost every currency in the world is declining against the US dollar as they [the US] look to disinflate along with the rest of us," Orr said. [my emphasis]

Hmmmmm..

Diary of a deranged “ample reserves regime”

We are embarked on shrinking the balance sheet, and the test will be back to levels that satisfy the public’s demand for our liabilities – that’s currency, and reserves, and things like that – but also with reserves maintained at a level that is consistent with our ‘ample reserves regime.’ So the balance sheet is substantially larger now, obviously, and consequently the runoff process is designed to be substantially faster than the last cycle; on the tune of a trillion dollars of runoff per year, once it’s up to full speed. As far as returning to a scarce reserves regime, I guess I would say that I think our current operating framework is a better one, and I don’t see a case for returning to scarce reserves.

And why is that? So, the world has really changed as a result of the global financial crisis and the pandemic. The scarce reserves framework would be challenged to work in a world where there’s very high and sometimes volatile demand for safe and liquid assets, central banks may have to rely on large-scale asset purchases from time to time in response to severe shocks, and remember that the large financial institutions hold very large quantities of safe assets now as a liquidity buffer, and that includes a lot of reserves. So the bottom line is that the quantity of reserves is just so much higher that it would seem to be impractical to try to manage scarcity, and demand will be volatile too. We think the current system works well and it provides a lot of liquidity, so it’s kind of a net gain.”

– Fed Chairman Jerome Powell, Cato Institute Monetary Conference, September 8, 2022

Let’s take a closer look at the atrocity the Fed is defending as its “ample reserves regime.” The chart below shows total Federal Reserve liabilities as a fraction of nominal GDP, along with the 3-month Treasury bill yield over-and-above the interest rate that the Fed (now) pays to banks and other financial institutions that hold these liabilities. The chart is our version of what economists know as the “liquidity preference” curve. I’ll explain it in greater detail after you catch your breath, but it’s worth noting at the outset that in the entire history of U.S., Fed liabilities never materially exceeded 16% of GDP (0.16 on the horizontal axis) until 2010, when the Fed went full-tilt loony tunes with quantitative easing. The discontinuous leap to a balance sheet greater than 25% of GDP occurred when Powell doubled down, literally, in 2020.

What Powell describes as a “scarce reserves regime” is actually the policy environment that operated under during the entire existence of the Federal Reserve prior to 2010. It worked like this: in order to influence short-term interest rates and the money supply, the Federal Reserve would go into the open market and purchase Treasury securities, gold (mostly prior to 1970), or other government-backed assets. In return, the Fed would create “Federal Reserve liabilities” – currency and bank reserves – to pay for them. You can see what a Federal Reserve liability looks like by reading the top line of a dollar bill. The terms “Fed balance sheet,” “Fed assets” and “Fed liabilities” are often used interchangeably, because they’re different sides of the same coin.

Historically (until QE) Fed liabilities did not earn any interest. Banks and individuals were still willing to hold them because they provided immediate liquidity. Equally important, varying the “scarcity” of these zero-interest liabilities was precisely how the Fed set short-term interest rates. As the quantity of currency and bank reserves (base money) becomes more plentiful, investors become uncomfortable with all that zero-interest liquidity, and begin seeking alternatives that might offer a greater return. Their closest alternative is Treasury bills. So as the quantity of base money increases, Treasury bill prices are bid higher, and their yields are bid lower. This process continues until investors are indifferent between holding zero-interest base money or low-yielding Treasury bills.

Put simply, when the Fed floods the system with reserves, the public tries to get rid of the excess, and will accept dismally low T-bill yields to get a “pickup” over whatever reserves are paying (historically, zero). When reserves are scarce, the public is hesitant to get rid of them, and holders need the incentive of high T-bill interest in order to part with them. That, in a nutshell, is how Federal Reserve operations impact short-term interest rates.

A critical feature of this process is that once a dollar of base money has been created, someone in the economy has to hold it, at every moment, until it’s retired. It can pass from one holder to another, from the buyer of T-bills to the seller of T-bills, from the buyer of stocks to the seller of stocks, but there’s no way to get “out” of zero-interest base money in aggregate. Until the base money is retired by the Fed, somebody has to hold it, even if nobody wants it. It’s a hot potato.

You can see in the chart precisely how Paul Volcker crushed inflation in the early-1980’s. Volcker cut the Federal Reserve’s balance sheet to less than 5% of GDP. That scarcity of Fed liabilities did two things. First, investors and banks who needed immediate liquidity became willing to sell Treasury bills at lower prices in order to obtain base money, and holders of base money became very reluctant to give up their liquidity unless they were compensated by a very high interest rate. As a result, Treasury bill yields briefly shot above 15%. More importantly, however, Volcker’s restriction of the money supply convinced the public that the Federal Reserve would not passively finance government deficits, restoring confidence in fiscal stability and stable prices that was lost a decade earlier when the U.S. abandoned the gold standard, closed the gold window, and ushered in floating exchange rates.

As Nobel economist Thomas J. Sargent has observed about severe inflationary episodes, “once it became widely understood that the government would not rely on the central bank for its finances, the inflation terminated and the exchanges stabilized.” Sargent also observes that severe inflations have been driven not simply by the quantity of central bank liabilities, but instead by “the growth of liabilities that are unbacked, or backed only by government debt, for which there was never a prospect to retire.” Governments can typically expand their debt in line with the growth of the economy itself, without inflationary consequences, provided that the overall debt-to-GDP ratio is serviceable. But once the public loses confidence in government restraint, because of unrestrained government deficits, overly accommodative monetary policy, or both, inflationary expectations can become embedded. That’s particularly true if the economy also faces supply shocks. It’s also why Section 2A of the Federal Reserve Act mandates that the Fed “shall maintain long run growth of the monetary and credit aggregates commensurate with the economy’s long run potential to increase production.”

In the Federal Reserve’s arrogant defense of an “ample reserves regime” and dismissive regard for the so-called “scarce reserves regime” that has defined monetary policy for a century, the Fed is telling the public that it has no interest in restraint.

As investors, we’ve already addressed this prospect by abandoning our reliance on previously reliable “limits” to speculation – becoming content to align ourselves with prevailing market conditions, particularly valuations and market internals. But our concern is also for the public interest, and I remain convinced that the Federal Reserve is willfully ignorant of the consequences of its actions, both on yield seeking speculation and on the public confidence in government liabilities.

Link : Now Comes the Hard Part - Section: Diary of a deranged “ample reserves regime”

Wonder how our dollar would look if we'd started lifting earlier and faster, instead of leaving our OCR on the floor for months longer than it should have been, and only lifting in fits and starts when the rest of the world is starting to look at 100bps hikes as a bare minimum? 

I'm truly impressed Adrian still has his job. Bravo sir, Bravo!

Orr's credibility is on a similar trajectory to the NZD.

The problem the world faces is that the global reserve currency has too much debt relative to GDP. And it is going to make the rest of the world suffer for its own lack of productivity (or living beyond its productive capacity/means). It can only do that while is holds reserve status. If/when this advantage is removed, it could be a quick fall from grace for the US, with significant global geopolitical instability, and a large fall in living standards for US citizens. Creating more money to inflate away their excessive fiscal deficit spending (to maintain their standard of living and global military superiority) is going to become a nightmare for everyone around the world. 

The US could become very much unliked on the world stage after this has all played out - the opposite of WW2. 

Putin appears to be onto it - not that I like Putin or what he stands for. But he appears to understand macroeconomics quite well - much better than the democratic party of the USA or the leaders of the Eurozone. 

no worries then,just another tweak at the next meeting. keep gliding on.

In a "relative" sense New Zealand is in an excellent position, he (Orr) said.

OMG, com'on Mr Orr, NZ is in a terrible position.  I'm no economist but it seems pretty clear to me, and many other commenters on Interest that:

- Inflation is too high in NZ

- The OCR needs to be raised further to lower inflation

- The raising of the OCR and interest rates generally (also due to swap rates) is going to throw NZ into a serious recession in 2023 (my view)

- We'd like to avoid a deep recession by not having rapidly surging interest rates but we can't do that because our currency, the NZD is plummeting, thus increasing our tradable inflation.

So you, Mr Orr, have no choice but to keep increasing the OCR, thus throwing NZ into a deep recession in 2023, at which point inflation will drop significantly but the damage will have been done, businesses will close down, employees will lose their jobs and NZ will be a mess.

Wake up Mr Orr!

Kaumatua Orr would never let himself face people who could ask the hard questions. The media is not going to ask those questions because they're probably be risking their careers in the economics and political reporting / comms positions they perform. Who would hire them in a media role or in some comms role in the public sector if they were seen as asking difficult questions? 

So all you will get are these rear-view mirror speeches telling people what they already know; attempts to minimize any responsibility on his or his orgn's part (no wonder most of the RBNZ senior staff have already jumped ship); and the ol' "relatively better than the rest of the world" spin.   

So in other words, ocr won’t / can’t go up much further! Backed into a corner with massive household debt from a messed up housing market. The damage was done last year. 

Those that jumped the RBNZ ship must be happy...I wonder how Yuong Ha's sons cricket team is getting on? I'm sure it's performing better than Orr and the NZD...

Orr "Yuong Ha, our chief economist, has chosen to go into a far more challenging role. What are you going to be doing?"

Ha, who was sitting next to Orr, responded, “Coaching my son’s cricket team, taking a break.”

https://www.interest.co.nz/public-policy/113432/grant-robertson-unconce…

Just a wild guess, but judging from the comments above, most people now 'get it'.

And even worse, they're starting to get that queezy feeling in the pits of their stomachs; one that may not have been there up until now -  that a previously unthinkable set of events is right in front of us.

Orr is shameless character. Not all currencies gone down by 25%. He needs to step down. 

because we've done so much already, the tightening cycle is very mature. It is well advanced.

So, we've got a little more to do before we can drop to our normal happy place

Sounds like a flip-flop is coming soon...

Will all the US dollars going home cause more or less inflation in the US?  Imports will be cheaper, but where will the money be parked.  Who can borrow it a these high interest rates.  Sounds like a major crash is on the way!

Farmers will keep NZ afloat as they have always done when the NZD tanks!

In a "relative" sense New Zealand is in an excellent position...

Relative to...?

I have concerns that by allowing our currency to plummet we will import inflation and ultimately have to endure even higher rates. Our long-term outlook needs to be more balanced.

RB Governor says almost every currency in the world is declining against the USD. Thats nice...but who cares about every other currency? Whats being done to stop/slow the NZD declining.. let me guess...nothing at all...lol

Inflation and a component in NZ's inflation. Are we not shooting ourselves in the foot?

https://www.newshub.co.nz/home/world/2022/09/ukraine-invasion-joe-biden…

Biden pushed back against Russian complaints that Western sanctions are harming its exports,

stressing that US sanctions explicitly allow Russia to export food and fertilizer and that it was "Russia's war that is worsening food insecurity."

Yet in NZ we have a 35% import duty on all Russian goods. Check out MBIE website. I did not locate an exemption.

What's going on here?

Productivity, productivity, productivity. that hoary chestnut. Certainly something to think about as Orr says. Put it back on the poor old worker. Who is already working long hours etc. We are told that businesses need to invest in engineering and technology to improve productivity. Unfortunately because most of our exports are in primary produce from small run holders there is not much room to move. Where can this increase in productivity come from?

Double post

Productivity comes from brave decision-making & some balls to see it through. It has to be high tech, even with food. We have to do this. Now's good.

With Adrian virtually doubling the size of the Reserve Bank over the past 4 years with no discernible increase in the quantity or quality of outputs, is he really the right guy to be lecturing us about productivity?