By Roger J Kerr
The first leg of the double has come in (as expected) for the near term direction of the NZ dollar exchange rate against the US dollar.
The announcement last week from Fonterra that the forecast for their milksolids payout to dairy farmer milk suppliers for the 2016/2017 season would be $4.25/kg was at the bottom-end of expectations.
The Kiwi dollar depreciated on that negative economic news from 0.6770 to 0.6700.
A stronger US dollar on global FX markets stemming from a speech on Friday by Federal Reserve boss Janet Yellen that another interest rate increase is likely in June or July will also work to maintain the Kiwi dollar on that weaker trajectory over coming weeks.
The second leg of the double for a lower Kiwi dollar is the RBNZ’s Monetary Policy Statement on June 9th, wherein another interest rate cut should be delivered.
The financial markets are far from convinced that Governor Wheeler will back his warnings of the need for a lower currency value with overt action to reduce interest rates.
The local interest rate market is not pricing for a cut next week, however the forward pricing is for a 0.25% decrease in the OCR by August. The bank economist fraternity is about 50/50 on whether a cut will be delivered on 9 June.
In my view, there are two good reasons why Governor Wheeler should have the courage of his convictions and cut the OCR to 2.00% next week:-
- The dairy industry is in financial crisis with a third season in a row of milk prices (thus incomes) below the average cost of production. The RBNZ slashed short-term interest rates last July when wholemilk powder prices plummeted and the threat to economic growth was very real. They need to be consistent and be adjusting monetary policy again to accommodate the financial pressures building in our largest industry. Bank lender patience towards the dairy industry will now be running thin and the RBNZ should be well aware of the economic ramifications from that situation, thus an OCR cut is justified.
- As has been stated previously in this column, Governor Wheeler should be looking across the Tasman at the Reserve Bank of Australia (RBA) for a lesson in how to surprise the markets and gain maximum traction of a lower exchange rate value from an unexpected OCR rate cut. The AUD/USD rate has plunged six cents from 0.7800 to 0.7200 over the last few weeks following the 3 May RBA ambush. The local financial markets are not expecting a cut next week, therefore it is a prime opportunity for the RBNZ to act if they truly believe a lower exchange rate is required to assist dairy and lift inflation back into the required 1% to 3% band. Over the last six months the RBNZ have witnessed the Kiwi dollar move upwards following their various monetary policy decisions. In December 2015 when they cut the OCR the Kiwi appreciated when the accompanying messaging was that it may be the last cut. In March when they did surprise the markets with a cut, a bearish Janet Yellen and weaker USD immediately afterwards negated their action. In late April a “no cut” decision sent the Kiwi dollar up two cents.
If there was a trifecta available, the third leg for a lower Kiwi dollar would be the current FX market positioning in the NZD/AUD cross-rate.
The NZD has only depreciated four cents against the USD from its high of 0.7050 three weeks ago, whereas the AUD is down six cents over the same period. The result has been a sharp shift higher in the NZD/AUD cross-rate from 0.8900 to above 0.9300.
Speculative buying of the Kiwi dollar against the AUD after the RBA interest rate cut in Aussie a month ago has also been behind the NZD/AUD cross-rate movement higher.
At some point, not far away, those punters and traders who bought the Kiwi against the Aussie dollar will be persuaded to unwind their long NZD positions i.e. become sellers of the NZD.
The historical pattern of the NZD/AUD cross-rate over the last 12 months has been rapid moves up by three or four cents, followed by equally fast falls back to the 0.8800/0.8900 region. Current forex market positioning suggests a repeat of the pattern, however it may require a nudge from Graeme Wheeler next week.
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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
8 Comments
I am actually seriously worried that the idiots in charge in the US and Europe have created the preconditions for revolutionary change. Give me evolutionary change anyday. The French will have politicians hanging from lamposts within a few years at the rate they are going.
The dairy industry is in financial crisis with a third season in a row of milk prices (thus incomes) below the average cost of production. The RBNZ slashed short-term interest rates last July when wholemilk powder prices plummeted and the threat to economic growth was very real. They need to be consistent and be adjusting monetary policy again to accommodate the financial pressures building in our largest industry. Bank lender patience towards the dairy industry will now be running thin and the RBNZ should be well aware of the economic ramifications from that situation, thus an OCR cut is justified.
Isn't your justification a clear opportunity for the US Treasury to charge that our easy monetary policies are also designed to gain competitive advantage, rather than to hit domestic inflation goals?
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