📝Macro-pru Measures to Prove Less Helpful In SEK and NZD: J.P. Morgan Strategy

Small open economies are by definition more sensitive to import inflation and more exposed to the disinflationary consequences of globalization that dominated the pre- covid world.

In G10, the Scandis, Antipodeans and Canada stand out in that regard. Indeed they have been some of the most active users of macroprudential policy to address financial stability.

In New Zealand macroprudential policy has been used to smooth the impact of tighter monetary policy so that interest rates can continue to rise, which supports NZD, all else equal. Taken at face value macro-pru is positive for NZD FX, but it has delayed the impact of higher rates on the economy and allowed the RBNZ to over tighten, ultimately facilitating a worse growth outlook for NZD.

While our Canadian economist maintains a negative outlook on the housing sector over the forecast horizon, they are not expecting a disorderly correction and macro-pru measures go some way to contributing to that view, which arguable softens some the risk of certain left-side tails. Nevertheless we do believe the still weak housing sector weighs on CAD FX relative to currencies such as USD and JPY.

The rate on the existing stock of loans rises as consumers refinance, despite the best efforts of macroprudential policy to cushion the blow, which may have been more successful in Canada and for CAD, but less so for SEK and NZD where macro-pru in conjunction with central bank tightening may have exacerbated cyclical risks for the currency.

- J.P. Morgan Strategy