By Roger J Kerr
Last week ahead of Saturday’s general election I painted three scenarios for the NZD/USD exchange rate movement post the election based on the election result.
I did not percentage-weight each of the scenarios in terms of probability of occurrence, which is a standard risk management technique.
Just as well I did not risk-weight, as I do not think anyone would have given a clear-cut National Party victory a serious probability.
The view expressed was that the Kiwi dollar would go up on a decisive National win.
Therefore importers and exporters with FX risks and hedging in place should expect a short-term surge of appreciation for the NZ dollar over coming days, potentially up one cent from the close last Friday of 0.8130.
The election result is a massive endorsement and recognition of the strong economy, stable government and predictable economic policies by the New Zealand public.
There was no mood for radical change and New Zealand appeared to vote from where it always does - the back pocket!
Reflecting back on the political events of recent weeks and the election outcome one has to conclude that the mainstream political media and the Wellington political beltway had become completely out of touch with general attitudes and sense of satisfaction across the population.
Rising house prices, jobs available to those that want them and reasonable buoyant trading conditions for small businesses across the country meant that there was little support for more taxes and greater central government control of the economy.
In the end, the political sideshows and diversions that dominated the TV screens and radio airwaves were irrelevant.
One group of canny investors who did read the national mood correctly where the fund managers and institutions who last week bought the shares of the listed electricity generators/retailers in the expectation that Labour / Greens coalition would not get in and fundamentally change the electricity market.
The potential for uncertainty on economic policy direction has been removed; therefor everyone from the credit rating agencies to foreign investors into New Zealand will have a clear view going forward on the Government’s finances and economic conditions.
An expected stabilisation of milk powder prices should assist to add a more positive financial and economic outlook.
Over coming months the NZD/USD exchange rate however will still largely be driven by US dollar movements globally. The Australian dollar fell away sharply last week due to the resurging US dollar and lower commodity prices (CRB Index now below 280), closing well below 0.9000 at 0.8940.
The NZD/AUD cross-rate has rebounded upwards from below 0.8900 two weeks ago to 0.9120 this morning.
Further gains by the NZD against the AUD have to be expected in the near-term due to the independent NZD strength from the election result.
US economic data continues to print in a stronger vein and the Federal Reserve is slowly moving to condition the markets for interest rate increases next year. Continuing US dollar strength has to be anticipated.
New Zealand Inc has received a major boost of confidence and thus business/consumer confidence can be expected to remain at historically high levels.
While a strong US dollar on the global stage may pull the NZD/USD rate below 0.8000 in the medium term, the NZ dollar is set to outperform all other currencies against that strong USD, resulting in higher cross-rates.
Our forecast for the NZD/USD rate remains intact, marginal depreciation to around the 0.7800 area, however not a great deal lower.
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Roger J Kerr is a partner at PwC. 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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