Roger J Kerr says several factors are holding back the NZ dollar at the moment, but he does see it rising back over US70c eventually

By Roger J Kerr

There must be something rather unappealing about the New Zealand dollar to offshore punters at this time as the Kiwi has failed miserably to make any substantial gains against the US dollar over a period when the USD has been sold down against most of the major currencies.

To be fair, the USD has only lost ground to the Euro and UK Pound as those two currencies bounce back up in value for their own reasons. Over recent weeks the USD has posted gains against the Canadian dollar (lower oil prices and tariffs on exports) and against the Japanese Yen (previous safe-haven/geo-political gains for the Yen unwinding).

The Euro has appreciated against the USD from $1.0600 to $1.1025 as the US and European FX players have reversed previous short-sold Euro positions taken when there was a higher political risk of the far-right/anti EU candidate Marine Le Pen winning the French Presidential election.

Emmanuel Macron’s resounding victory this morning does appear to be a “buy the rumour/sell the fact” situation for the Euro, so I would expect the EUR/USD exchange rate to return to the $1.0600/$1.0700 area over coming days/weeks.

Having left the French Socialist Party to form his own political movement, Macron has a “Rogernomics” agenda of reforming labour markets and economic liberalisation. Not sure that is what the majority of France actually wants, thus the new President may struggle to implement most of his economic policy agenda.

There is certainly no reason for the US dollar to be weakening on US economic grounds.

The April jobs increase bounced back impressively from a slightly weaker March figure. US business investment was very strong in the March quarter as many industry sectors are unshackled by Trump from environmental and other regulatory/controls.

Whilst President Trump has been slow to implement most of his election campaign pledges, the reduction in red-tape restrictions for business is one area that both Wall Street and Main Street have celebrated with positive investment intent. Therefore, the Federal Reserve have quite rightly dismissed the weaker March quarter GDP growth numbers as “transitory” and remain firmly on-track to raise their short-term interest rates another two times this year.

Locally, commodity price increases and the prospect of a higher OCR interest rate earlier than the RBNZ currently project are very much Kiwi dollar positives.

The Government’s budget later this month on the 25th, will highlight the economic policy choices Finance Minister Steven Joyce will have as fiscal surpluses are generated from an expanding economy.

The National Government will be seeking the right balance to use the cash surpluses to gain votes in the September general election from a mixture of tax cuts, debt reduction and increased spending programmes. The economic policy choices New Zealand has stand in stark contrast to the ongoing budget deficits the Turnbull Government has in Australia (their budget statement is on Tuesday 9th May). Expect a continuation of the NZD/AUD uptrend to 0.9400 as the AUD depreciates below 0.7400 against the USD on Aussie fiscal woes.

The NZD/USD exchange rate repeatedly bounces back up from 0.6850, however further gains to above 0.7000 have not been achievable at this time for two main reasons in my view:-

  • The potential for import tariff restrictions into the US for NZ export products is weighing heavily on currency investor’s combined minds, as increased global trade protectionism is clearly a large negative for the NZ economy and thus our exchange rate. The Kiwi dollar may struggle to make substantial gains until US trade protection policies are clarified after the current three-month study investigation by the Trump Administration.
  • New Zealand political risk has finally come into focus for the forex markets as the latest Roy Morgan political opinion poll has the Labour/Greens coalition neck to neck with National on 43% support each.  Therefore, Winston Peters’ NZ First Party at 10% would hold the balance of power to form a government.

There is a lot of water to go under the bridge yet on NZ political developments over coming months, however the incumbent National Government has a challenging sales job to convince the public that plenty of jobs, strong economic growth, low mortgage rates, increases in house values, lower petrol prices and potentially lower taxes are all positives that should be embraced.

Another reason why the NZD/USD rate may struggle to hold above 0.7000 in the near term is the fact that the US dollar itself is expected to recover lost ground against the Euro and Pound. After that occurs, the strength of the NZ economy and the prospect of higher interest rates should underpin the Kiwi above 0.7000.

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Roger J Kerr contracts to PwC in the treasury advisory area. 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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10 Comments

"however the incumbent National Government has a challenging sales job to convince the public that plenty of jobs, strong economic growth, low mortgage rates, increases in house values, lower petrol prices and potentially lower taxes are all positives that should be embraced"

Lol, what?!? What kind of sloganeering is this. Let me try;

"however the incumbent National Government has a challenging sales job to convince the public that excessive immigration, suppressed wages, phony economic growth, unaffordable housing, congestion, increasingly polluted waterways and a lack of health and police spending are all positives that should be embraced"

And given the article is primarily about currency, try an NZD at US 50 cents before the current economic cycle is finished. Sounds crazy doesn't it, but let's see.

.

USD is something you buy and hold for a rainey day.
Like an umbrella. Always good to have one.

In currency or in assets?

Depends on your timeframe for holding.

3 to 5 years? I was thinking of getting some S&P500 ETF shares before the NZD slides too much more.

3-5 years is a very very long time in forex world.

Cash/currency is good because it can easily be moved and can be moved very quickly. You can also hold foreign currency inside NZ which reduces risk of it being trapped or taxed. The downside is that it doesn't offer any return, so in pure investment terms it is a speculation (may not matter if your goal is a hedge).

Shares/options are more liquid than hard assets so can usually be moved quickly. But they are held offshore and cannot be transacted locally. You get a return from shares but there will be tax implications; worst case a tax department will want their payment before the dividend gets to you (a serious cashflow question).

Share/options sounds all very doable in your timeframe, which is so long you could even buy and sell a hard asset like a house!

Just my opinions of course and not financial advice.

Thanks for the info Ralph. I will look into foreign currency accounts in NZ as I had not considered those before. Unfortunately house flipping, speculating or investing is out of the question; a bank won't lend to someone on $42k with a $10k deposit!

Cash is always king.

"Winston Peters’ NZ First Party at 10% would hold the balance of power"

Now why would forex markets not find that an attractive outcome??