By Roger J Kerr
The love affair that global investors and currency speculators have had with the NZ dollar over recent years has certainly turned sour over the last two months that this commentator has been overseas on holiday.
The overall currency value as measured by the TWI Index has depreciated 6.5% from 76.00 to 71.00 over that time.
The independent NZ dollar selling due to a combination of inter-related events that turned the sentiment negative and sent the NZD/USD rate well below the 0.7100/0.7200 level that I thought would have provided some support.
The slide in the NZD/USD rate to 0.6700 has on this occasion not been due to general USD strength on global FX markets (the USD Index has been stable around 96.00 over the period), however entirely due to specific and independent negative NZ factors, namely:
- Plummeting dairy prices as the international supply/demand imbalance is taking longer than expected to rectify itself.
- The surprise RBNZ’s decision to cut the OCR mainly due to the negative impact of lower dairy prices on the NZ economy.
- Weaker than expected export trade and GDP growth data over the first quarter.
- A weaker AUD as copper and other hard commodity prices tumbled when China cut their interest rates and the Chinese commodity carry trade/financing arrangements were unwound.
- Weaker global sharemarkets (risk/volatility measures increasing) as a result of the Greece uncertainty and plunging Chinese sharemarkets.
The question for the FX markets from here is to what extent the NZD/USD rate at 0.6700 has already price-in a total of four OCR cuts to decrease the official interest rate to 2.50% and Wholemilk Powder (WMP) prices remaining at USD2,050/MT. In my opinion the 0.6700 rate has already fully priced such outcomes.
These two driving determinants of the NZD value are inter-related in that any recovery (unlikely in the immediate future) in WMP prices will reduce the probability of all four 0.25% interest rate cuts occurring. If WMP prices fall further, continuing NZD weakness to 0.6500 and potentially below would result. What is likely is that the substantially lower USD2,000/MT price for WMP will reduce the volume of product being supplied to the globally traded market as it is just not profitable for many producers to sell at that price level.
What has been interesting to observe from outside NZ over recent weeks is the seemingly unanimous chorus that an even lower exchange rate value is the best thing for our economy.
It is like wishing that your company share price, or enterprise value, would reduce further??
Most exporters will tell you that a generally stable and low volatile currency is more important to them than the absolute level. The Kiwi dollar’s 20 cent drop from 0.8800 over the last 12 months does not help the desire for lower volatility (currency hedging programmes/policies can deliver this). A depreciating or undervalued NZ dollar also entices our exporters to sell on price alone, which is never a recipe for successful long-term product market positioning and wealth creation. A currency that is too low potentially makes our exporters complacent and lazy in respect to product development and moving up the value chain.
What is encouraging is that the automatic shock-absorber to the economy that a floating (and lower) NZ dollar provides when our key export commodity prices fall continues to work well.
The NZ dollar has a history of over-shooting on both the topside and bottom side on its major realignment moves.
What is not yet clear to me is whether the bottom side overshoot on this occasion is 0.6600 or 0.6200.
Future movements in WMP dairy prices over coming months should provide that answer.
To subscribe to our daily Currency Rate Sheet email, enter your email address here.
Daily exchange rates
Select chart tabs
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
24 Comments
Sure, volatility is one thing. The other thing is that with a low currency, our overseas debt becomes bigger. So whereas the farmers will make more profit than otherwise in the short term, their borrowed money will become more expensive in the future... It balances out in both directions.
epends which way our borrowing is going - if we are borrowing offshore, and funding internal projects. it's reduces costs.
then we need to swing balance of trade other way before paying the debt servicing at peak in the other direction. Generally one isn't expected to pay off government debt, only service and refinance it.
-
Was walking through a Mall today. Interesting how feminism has transformed the retail sector. HUGE inventory amount of clothing, accessories (aka j...), cosmetics, some food and coffee, 2 travel places...but I just really amazed at the amount of pure consumables compared to 10 years ago - especially given NZs debt and median earning per person (and this in a provincial center).
The number of retailers doing image and consumables would be a reversal of ratios 10yrs ago : 66:33. _Very_ few stores around town doing items of added value.
Where does the funding for all this consumption come from?
Easy does it. It would be all over by now if the majority of our foreign debt was raised directly in foreign currency. As it happens the banks which finance the C/A deficit on the citizens behalf hedge with currency swaps, while the government raises its publicly traded IOUs in NZDs. The big publicly recorded exposure is foreign investors (supposedly retail ) directly purchasing Eurokiwi, Uridashi and Kauri bonds for yield against say, JPY. - estimated outstanding issuance is currently NZD ~40.697 billion - even here the NZD issuer has swapped the proceeds for USD sub libor financing borrowed by our local banks' foreign subs. Hence the investor bears the currency risk.
Most exporters will tell you that a generally stable and low volatile currency is more important to them than the absolute level. The Kiwi dollar’s 20 cent drop from 0.8800 over the last 12 months does not help the desire for lower volatility (currency hedging programmes/policies can deliver this).
Yeah I'm sure all the exporters are really upset about the 20 cent drop and would prefer a stable 88.
Fonterra Farms will be well pleased that all that productive hedging is shielding them from the lower dollar.
It's no longer a "slam dunk".
International energy watchdog IEA said it expected global demand growth to slow next year to 1.2 million barrels per day from 1.4 million this year – far less than needed to balance stubbornly growing non-OPEC and OPEC supply. Read more
The established 12 month Libor uptrend is fading at this juncture. View graph
the fly in the ointment
http://www.mybudget360.com/global-debt-total-amount-of-debt-world-gdp-t…
Lee AdlerThis is not to say that all is well in retail sales land. Jeff Snider at Alhambra Partners showed that the growth rate of retail sales ex autos has turned negative. That means that the growth in total sales has been driven by surging auto sales as other retail sales have slowed. People who can get credit, or have the marginal income or wealth to buy cars are spending more, a lot more. Some of those sales are due to the growth of questionable non-prime credit growth.
Likewise, we know that top line sales growth per capita is not due to the majority having growing incomes. Wage growth is slowing. Real median incomes are stagnant. Sales growth has been driven purely by the growing wealth at the top of the income spectrum. They are spending their stock market gains. Bernanke was right about that. It was probably the only thing he was right about. Where he was wrong is that there would be trickle down effects. Instead the wealth pooled at the top. The trend of rising retail sales can persist only as long as the stock market keeps rising. When that stops, the dam will break and the fictitious wealth created by central bank driven stock market gains will disappear. Retail spending will collapse, without any of the gains having reached the majority of people.
of course wealth ppols at the top, thats how it works.
if it wasn't the mailboy would have a key to the executive bathrooms until it became that way.
that's what socialism actually is. A social response that attempts to use one of the few tools available to redress the failing of that social mechanism. Those whom are at the top are so because they network to each other to build things that way.
How many non-mentored people are at the top?
This is because the social top and the resource are out of practicality the same them (the monkeys with the best bananas and most banana to show get to sit at the popular spot).
Unfortunately this puts those at the top in the dilemma, live it up with trophy wives and pat yourselves on the back how god has recognised your destiny and skill (this goes for the trophy wives too). Or do they find ways to empower the system.
Some use charity - that just enables the system to continue to fail with less visible damage, and feel good on the top.
some hand over responsibility to government, some then make sure government serves their pockets instead. (generally because government are pretty clueless and have the ultimate deep pockets).
some ignore the problem.
IMO, this project can be delegated, can't be "social responsibility'ed", can't left to the market, can't be left to experts who created the mess, nor can be be forced by law (see government just above). As that only transfers the power and the mechanism out of the hands of those with the resources.
It might seem we have no easy answers for this....and you'd be right, this is an area in which none have ever wanted to ask the questions. (far more fun to be rich, or continue to fight to be at top, or to take up draconian law and blame others for the damage)
"In 50 short years, debt has gone from being a luxury for a few to a convenience for many to an addiction for most to a disease for all."
James Butler
The problem is, the more debt we have, the more future income must be used to pay the debt and its interest, which reduces the money we have to spend on things. This works to slow the economy.
Eventually, the negative effect of the debt load becomes stronger than the positive effect of the added spending and a recession is triggered — or worse.
http://ivn.us/2014/06/11/what-is-the-real-us-total-debt/
Aj ...If u have not already seen/read this... I recommend it.
Ray Dalios' view on debt cycles, productivity and deleveraging.
He uses huge amounts of common sense..
His "Map" of the global economic landscape has been really useful for me....
His redefinition of the laws of supply/demand and price elasticity have been an "eye opener " for me...
http://www.economicprinciples.org/
cheers
He has missed the shadow economy.
I provide shelter for my kids - it is economic action, service is provided, no money.
I help 3 friends shift houses and the don't pay the moving company - It is a service, the moving company doesn't get money.
My girlfriend provides ...companion services... and I for her - we do not exchange money, yet others do charge for the same service.
Groceries and second hand clothes, even music are products often supplied from a seller without a credit+money buyer yet used to make up important parts of our economy.
I provide rates and levies and taxes to the government - they do not provide me with goods or services, thus I am forced at threat to be a buyer ... but there is no seller. and I'm drawing on credit to do that, as the money I have to surrender to them for nothing could have deleveraged me.
My (ex)girlfriend also does voluntary work for St John, they do not have to pay her, not even minimum wage, thus services provided as seller but no money or credit is exchange - same for all the leaders and assistants, even many of the ambulance crew provide services without pay.
Likewise the government pays her a passive income of over 25k a year (DPB). for things which were her responsibility to do any way, the "product" is never given to the payer. We all pay and get nothing, as buyers. she as seller parts with nothing and can do so wherever in NZ she feels like renting, or if she lives in a non married state with a houseowner with anyone who isn't me.
prices rise _because_ of interest (otherwise it would just be a productivity rise, which is directly paid for by money)
however the interest on the debt doesn't go away and neither do the debts, when the CB attempt to "control inflation". The result is that the over-allocation of credit, from enhanced incomes, disappears. If the CB "controlled inflation" by it's lever then their might be hope for this mechanism to function. But it doesn't, it destroys productive income at the expense of existing creditor protection (all debts are still honoured)...but the lower interest has to be paid for by reduced incomes which is why the system crashes when it doesn't have to.
Now think about it for a moment - if all the people are carrying debt, and paying interest at "high". if the CB reduces the interest rate to "low", then wouldn't that theoretically mean those people have more disposable income to deleverage principle? _without_ affecting their money spending.... As long as they're not actually living on credit then the short term debt cycle _should_ ease.
And since the interest was low more people would take on projects to spend.
Because as we're finding now, interest is low going into recessions... which _should_ make debt easier to repay.... and interest is high when times are booming because more people have income to take on the risk.
But risk analysis says the opposite. High interest must be paid when the investment is less likely to return full value.
prices rise _because_ of interest (otherwise it would just be a productivity rise, which is directly paid for by money)
I think u are wrong about that.... Prices rise because of the dynamics of supply and demand.... in which availability of credit plays a big part. ( larger quantities of money can bid up prices )
( of course interest costs play a part.... just like any other cost )
ALSO.... productivity gains are a deflationary force... and all things being equal....SHOULD result in cheaper prices...
For me Dalio has the best "road map" ...which explains the basic transactional mechanics of an economy and which includes the impact of credit as much as productivity/innovation..
Excessive Credit growth destroys/distorts the underlying fundamentals of Capitalism...which is "Capital Formation" .... which grows out of the counterbalancing forces of savings vs consumption .
Without that ...we have economies addicted to growth and consumption..... and the addictive drug is "debt".. ie,... excessive credit growth
just my view...
That is one problem.
Here's the other :
constructive debt theoretically creates increased productivity, which would pay the debt without significant reduction of productive income. And there's not much point increasing productive income if it's net result is to only produce the level of income that the unimproved productivity would have produced.
But interest is paid NOW, it doesn't wait "for _lumps_ in in the future.
And that is what puts up the prices, having to service debt (and pay compliance related costs, increased govenment, tax on new areas, artifically increased wages).
which would reduce peoples ability to buy - as the higher cost would be acceptable to less buyers
which would reduce turnover and reduce GP giving less ability to service debt. creating a naturally limiting credit process.
But our suppliers and customers also take on debt. That allows sales revenue to climb (even if we have to offer them trade debt to get the sales). And our suppliers increase productivity by using debt, the cost of which they must pass to us. suddenly we no longer face our enhanced productivity having to cover our own debt but also that of three parties.
In itself that is a minor problem.
But to pay that principle and especially interest, we must pay taxes - every transation then becomes a lossy process - and the government since it's quiet socialist reform from "public servant" to "uber masters" pays itself higher wages and more leave...all paid for by other peoples' productivity.
Even time debt is create, the principle is capital, which we must pay government minimum 20 -30% of our income to repay.
If we look at the debt isn't repaid in a lump aspect, why do we get that saw tooth collapse/recession?
those who drive the system are great at doing as they're told, getting educationists approval, filling out forms. But lousy at analyzing raw metrics from base movements or facing things that look bad.
Every credit creation is matched by existing productivity OR more credit. The more credit is paid for by more credit (HP sales, credit card sales, business loans to develop), so the credit compounds.
Productivity increases slowly and with natural limits.
Credit compounds as it's FIRE , pure money related. Without careful governors credit can increase indefinitely, - as Greece is proving - as long as no-one is willing to give up their investment to foreclose.
then how can anyone repay credit compounded debt, from productivity, without using more credit? ... while being taxed (and other fees, such as consent fees) to death doing it....
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.