By Roger J Kerr
It is a telling commentary on what factors drive the short-term direction of the NZ dollar exchange rate against the USD, when important New Zealand economic measures are negative and weaker than expected, however the currency does not weaken as a result.
Over the past fortnight three different local variables have all suggested that the NZ dollar should move lower but international economic and financial/investment market developments have again outweighed the local news:
- GDP growth numbers for the December 2011 quarter at just +0.3% were significantly below prior consensus forecasts of +0.6%. A run-down in stocks over the quarter was behind the weaker figure, so nothing fundamentally amiss.
- RBNZ Governor, Alan Bollard attempted to jawbone the NZ dollar downwards in the March monetary policy statement, correctly pointing out that future NZ economic growth will be hurt by the currency staying above 0.8000 against the USD, particularly when some of the key agricultural commodity export prices have reduced over recent months. The market largely ignored the Governor’s warnings.
- Wholemilk Powder (WMP) prices have continued to fall in the regular Fonterra/GDT online auctions as milk powder supplies onto the globally traded market have increased with the mild winter/favourable spring weather conditions in Europe and the US (milk production increasing there as well as in New Zealand). The previously high correlation between the NZD/USD exchange rate and the WMP prices has really broken down over recent months with the NZD not following WMP lower. In the short-term with the extra WMP supply situation it is hard to see WMP prices moving up, therefore lower prices in our largest export industry would suggest a NZD currency catch-up (i.e. lower) over coming months.
The international forces that continue to dominate NZD/USD direction over and above the domestic economic news continue to whip-saw the Kiwi up and down in the 0.8100 to 0.8300 trading range.
For the short to medium term the overpowering global determinants should continue to dominate:
- Chinese economic data continues to be behind speculative buying and selling of the AUD, hence the NZD follows against the USD. Back in January it was stronger than expected Chinese GDP growth that drove the NZD up from 0.7600 to 0.8400. Since that time the weight of evidence has increased that we will see their growth performance moderating as monetary policy continues to be eased and the official Government economic growth target for this year has been reduced from 8.00% to 7.50%. Chinese Performance of Manufacturing (PMI) data for March is due out on Monday 2 April and should it fall to below 50.00, selling of AUD and NZD currencies can be expected.
- The “risk-on”/”risk-off” mode of international financial and investment markets that seemingly changes with wind, continues to have a major influence on daily NZD movements. If the Dow Jones Equity Index is up 100 points on a particular days trading, it is guaranteed that the NZD will be up half a cent against the USD as investors buy the “growth/commodity” currencies alongside equities. A lot of the share market direction in the US comes from European developments with “firewalls”, “bail-outs” and “bank liquidity” dominating the newswire’s headlines.
- The USD itself has not been able to continue its push to a stronger position based on stronger US economic data. Federal Reserve Chairman, Ben Bernanke does clearly not trust the recent upbeat economic figures as being sustainable enough to permanently reduce the US unemployment rate. Whilst he still talks about the need for further loose monetary policy accommodation for the US economy, it will be difficult for the USD to make gains as there is the prospect of further printing of additional dollars by Mr Bernanke (USD negative due to the extra supply on the market). US jobs figures for March (Non-Farm Payrolls) on Friday 6 April are forecast to increase by 210,000, an outcome above this will have more market participants questioning Bernanke’s view and should be USD positive.
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The Australian dollar has weakened further against the USD than what the NZD has pulled back, resulting in the NZD/AUD cross-rate rising to 0.7900.
A number of observers in Australia from BHP, to politicians, to the RBA have finally recognised the damage the high AUD has had on the non-resources part of their economy.
Slowing Chinese demand does mean lower hard commodity prices, thus a lower AUD (and tracking NZD) over coming weeks/months. The balance of probability remains that the Kiwi dollar will break below 0.8000 to the 0.7800/0.7900 region
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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
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