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Roger J Kerr says our 'rock star' has moved away from its successful repertoire and many fans are already heading for the exit gates

Currencies
Roger J Kerr says our 'rock star' has moved away from its successful repertoire and many fans are already heading for the exit gates

By Roger J Kerr

The “Rock Star” economy and currency, which New Zealand has been labelled, has wandered away from its successful concert repertoire late into the evening and many fans are already heading for the exit gates.

The only part left of the economy that could be called Rock Star at this point in time is the Auckland housing market which has its own drugs fuelling its high activity levels.

Over recent weeks the trends in the rest of the economy have not been that flash.

International dairy prices have reduced at the last four Global Dairy Trade auctions.

Most see wholemilk powder prices bumping along the bottom for at least the next six months and then only a modest recovery as supply and demand forces equalise.

Unless the NZD falls a lot further against the USD to below 0.7000, dairy farmer milksolids payouts potentially average less than $5.00 for two seasons.

The knock-on negative impact on the economy from the reduction in rural incomes and spending should not be under-estimated.

Sheep meat and forestry prices are also down sharply, although the strengthening of the UK Pound post their general election result will help lamb prices as the NZD/GBP cross-rate decreases to 0.4850.

Whilst no-one is really suggesting that the NZ economy slows up very abruptly over the balance of 2015, the outlook is certainly not as rosy as it was a few months ago.

The Reserve Bank of NZ, in hedging their bets on the future economic path, indicated last week that the next change in interest rates would be downward if demand slowed up and prices/wages increased by less than their expectations.

The anticipated RBNZ’s “jawboning” down of the currency has been reasonably successful over the last two weeks as the NZD/USD rate has depreciated from above 0.7700 to below 0.7500 over a period when the AUD has strengthened and the USD has weakened in world FX markets.

Just how much of the gloss has come off the NZ dollar can be seen by the spectacular reversal in the NZD/AUD cross-rate from above 0.9900 to lows of 0.9400.

As was anticipated by this column, once the NZD/AUD rate turned the corner the speculators who drove the NZD up to 0.9900 would quickly unwind and reverse their positions and sell the NZD down. The speculators who bet on a parity-party for the NZD/AUD cross-rate late in the piece have been spectacularly burnt!

Whilst domestic factors have pulled the NZD back from the highs 0.7700 to the mid-point of its trading range at 0.7500, looking ahead it is more likely to be global currency market movements that act to drive the NZD/USD lower to the bottom end of its range around 0.7200/0.7300.

The USD itself weakened from $1.0600 to $1.1400 against the Euro on profit-taking and mixed US economic data caused by harsh weather conditions through February and March. The last employment number in the US for April of +223,000 new jobs indicates a return to more consistent and robust US economic data over coming months.

The US dollar is not expected to weaken any further against the Euro and a return to the $1.0600/$1.0700 region appears likely.

General USD strength against all currencies will be the main reason the Kiwi dollar spends some time at the bottom end of its 0.7200 to 0.7700 range over coming weeks/months.

For the NZD to depreciate further to below 0.7000 against the USD it would require something going horribly wrong with the NZ economy or the US dollar rampaging below $1.0600 to $1.0000 against the Euro.

Neither scenario seems that likely or probable in the writer’s opinion. 

Wholemilk powder prices moving below historical lows of USD2,000/MT would be disastrous for the NZ economy, however that appears unlikely with international powder buyers returning to the market to secure greater volumes at the lower prices.

Another wave of aggressive US dollar buying on global forex market to below $1.0600 against the Euro also seems a low probability with the markets already pricing-in US interest rate increase over the second half of 2015 with the USD strengthening from $1.4000 to $1.0600 over the last 12 months.

The signals from the Reserve Bank of Australia last week were that the Australian economy is finally improving and responding to the much looser monetary conditions of 2.00% interest rates and an AUD below 0.8000 to the USD.

News over the weekend that China has cut its interest rates by 0.25% should be positive for metal and mining commodity prices and thus supportive of the AUD currency value.

Further reductions in the NZD/AUD cross-rate to 0.9300/0.9200 over coming months should be expected with the AUD out-performing the NZD against the USD.


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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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8 Comments

Presumably the overseas speculators in the Auckland housing market will be loath to fight both a toppy price level and a negative exchange rate running together.

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NZD is like One Direction concert, commanding massive bunch of young, not fully matured followers. Their fan will eventually grow up and realise it just a temporary fad!

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The same infatuation that recently extinguished $billions of wealth from global sovereign bond investor's portfolios?

Even the best are doing it hard.

In March, billionaire hedge fund manager Crispin Odey said we all have “grandstand seats for an imminent market shock.” As it turns out, a “shock” was indeed “imminent” for Odey but unfortunately, he ended up on the field of play rather than observing from the bleachers. As FT reports, a leveraged bet against the Australian dollar that had been working well cost the London-based manager dearly in April. Read more

Global margin calls to settle losses are so great risk managers demand that discretionary NZD/USD rounding error positions are cut to free credit line liquidity.

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Time for NZ to cut.

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NZ may not enjoy enough foreign support to exercise that luxury.

China’s foreign currency reserves had their biggest quarterly drop on record in the first three months of the year and the yuan is trading at the closest to fair value since 2010, according Goldman Sachs Group Inc. That means less demand for assets in dollars and euros from the world’s biggest creditor. Read more

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Maybe the "Rock Star Economy' has rocks in its head.

Or maybe just on on an acid trip to the Middle East. Fuzzy Logic...somewhere.

Dumping 6 million worth of assets to ASS-uage a Millionaire Sheep fleecer to compensate for thousands of sheep deaths, that he, repeat he, repeat his business...killed off in transit, so NZ banned his business as too barbaric....YES'''his business.....was in the wrong....!so we pay.???!!!.to compensate for his woolly mistakes.

DUH?. What the FlocK???...whose logic are we following...some acid heads or what?.

"Like sheep to the slaughter"...these "Rock heads"

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Unless the NZD falls a lot further against the USD to below 0.7000, dairy farmer milksolids payouts potentially average less than $5.00 for two seasons.

The knock-on negative impact on the economy from the reduction in rural incomes and spending should not be under-estimated.

US real estate mogul and billionaire Donald Trump slammed the Obama administration over its Trans-Pacific Partnership (TPP) trade deal, labeling it as disastrous and warning that it will encourage US companies to slash domestic jobs.

“The new trade deal is a disaster,” The Hill quoted Trump as saying at the South Carolina Freedom Summit in Greenville, South Carolina.

“They don’t talk about currency manipulation,” he said. “That’s the tool all these countries are using to beat us.” Read more

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At lot of farmers will feel the pinch at 5$ I wonder how many OIO we will see for farms in the future

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