By Roger J Kerr
The NZ dollar has posted strong gains against the USD over the past two months, from 0.7500 in late November to 0.8330 currently.
Consistent with the majority of the movements up and down in 2011, the Kiwi dollar has been driven by external international factors and developments rather than domestic New Zealand economic changes.
The reality of today’s global economic environment is that exchange rates are relative prices, and relative to the rest of the world which has some economic problems and challenges, the NZ economic position and performance appears to outsiders to be both more stable and more robust.
Hence demand by global investors to have some of their funds parked in the safer NZ dollar currency.
The increase in the all the NZD cross-rates over recent weeks is clear evidence of this re-rating higher of the NZ currency at this time.
The market forces behind the NZD appreciation, particularly since early January, have been as follows:-
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Stronger than expected economic data out of China (GDP growth, industrial production and PMI manufacturing Indices) causing AUD and NZD buying by international hedge funds and currency traders as they continue to see these commodity/growth currencies as a proxy trade for China.
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Strong gains by the US Dow Jones sharemarket Index as the outlook for growth in the US economy continues to improve. Equities being preferred over bonds by hedge fund investors in 2012 after the strong gains by bonds (yield decreases) in 2011. The NZD/USD exchange rate remains highly correlated to the “risk-on/risk-off” sentiment and swings in the Dow Jones Index.
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The US sharemarket was given another boost two weeks ago with the pledge from the Federal Reserve to maintain US short-term interest rates at the record low levels until 2014. Lower for longer US interest rates was seen as negative for the USD itself in currency markets. Stronger than expected US jobs data in January released on Friday 3 February provided further fuel to the sharemarket gains.
- A rebound upwards in Performance of Manufacturing indices around the globe (including New Zealand) over the past two months has spurred hard and soft commodity prices higher. Wholemilk powder prices have stabilised over recent weeks in the Fonterra on-line Global Dairy Trade auctions. Many currency traders see this commodity price as a key lead indicator for the NZ economy i.e. we are one big dairy farm! The AUD continues to track copper prices as a lead indicator, and we continue to follow the AUD.
The brief assessment of the NZ economy by RBNZ Governor, Alan Bollard at the 26 January OCR review was not as downbeat as many local economic commentators had expected.
Increased agriculture production, delayed but lifting construction and improving manufacturing point to +3.00% annual GDP growth for New Zealand for 2012 in my view, well above most other forecasts.
If the stronger growth materialises into reality over the first nine months, the RBNZ will be forced to start increasing interest rates in September. That adjustment to monetary policy settings would be positive for the NZ dollar.
However, should the NZD/USD exchange rate remain well above 0.8000 in 2012, the GDP growth will not be as high as +3.00% as exporter returns would be impaired. The preferred forecast track is for stability in the 0.7700 to 0.8200 range until September and then higher.
While the NZD has arguably raced up too quickly over recent weeks, the probabilities of dips back to 0.7500/0.7600 have to be viewed as much less today than what was seen in the second half of 2011.
The major risk to the stable/positive NZD currency outlook is weaker than expected Chinese economic data, the NZD and AUD would certainly be sold heavily on such news.
While official Chinese economic growth statistics are still very positive, anecdotal evidence (e.g. steel production volumes) suggests that activity levels have slowed considerably.
The European debt crisis and economic recession is not having any great impact on the NZ dollar or the NZ economy. Local commentators who highlight the problems in Europe as a major headwind for the NZ economy this year appear to be misreading the situation entirely.
China is much more important for us.
The EUR/USD exchange rate is stabilising around $1.3000, however low growth and low interest rates in Euroland point to a weaker Euro exchange rate over the course of this year. It is hard to see the NZD/EUR cross-rate retreating back from the higher 0.6300 level unless the NZD is sold on its own due to weak Chinese economic data.
The Reserve Bank of Australia is expected to cut their official interest rates again this week, capping gains in the AUD against the USD at $1.0750. The NZD/USD therefore seems unlikely in the short-term to trade above the resistance level at 0.8380 and recoil back to the 0.8000 to 0.8200 range over coming weeks.
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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
3 Comments
Another easy desk top idea – Roger.
Many business people aren’t dealing just from the desk top internationally - Roger.
Because of culture and ethnical reason for many, the Asian market is not only much harder to access, but to sell our products. The economic/ political rapprochement takes a decade and business relationships need to be built over years - and believe me that is just the start.
Expect - a tsunami of :
http://www.caebuilding.com/upload/1/CAEI%202Q10%20PR%20pre-final.pdf
When people say to me, ‘How far is China behind the US in terms of technology?,’ I say ‘three months if you don’t count creativity’. If someone at MIT posts some results, then China can recreate it in three months. But it takes longer than that to train and instil creativity.
Harry Shum, Managing Director, Microsoft Research Asia
Its all dominos innit!
Here’s the detail of the IMF’s overnight call that China would be in the direct line of fire in the event of a European credit event:
Should such a tail risk of financial volatility emanating from Europe be realized, it would drag China’s growth lower. The channels of contagion would be felt mainly through trade, with knock-on effects to domestic demand. In the downside scenario outlined in the WEO Update—which would see global growth falling by 1¾ percentage points relative to the baseline—China’s growth would fall by around 4 percentage points (Box 1). The risks to China from Europe are, therefore, both large and tangible.
On the contrary Roger, I would argue it does makes sense to look at Europe when considering the NZ economy since any problems there directly affect China which in turn impacts us. The IMF believes it could halve China's growth rate as quoted below.
"An escalation of Europe’s debt crisis could slash China’s economic growth in half this year, the International Monetary Fund said Monday, urging Beijing to prepare stimulus measures in response"
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