By Roger J Kerr
The value and direction of the NZ dollar seems rather inconsequential and irrelevant as the nation reels form the largest natural disaster ever experienced in New Zealand.
It is far too early to be accurately estimating the economic impact of the Christchurch earthquake, however what is apparent is the +3% GDP growth forecast for this year is postponed by 12 months to 2012.
The quake is clearly negative for the economy short-term - however very positive in the medium to longer term when the massive re-build is added on top of the record high export commodity prices we are currently enjoying.
What all this means for the NZ dollar currency value is that the down/up direction and pattern forecast for this year is pushed further out in timing. It was previously expected that increasing short-term interest rates in New Zealand in the second half of 2011 would be pushing the NZD back up again on its own accord at that time.
Any official interest rate increases are now going to occur much later (that is, early 2012) as the RBNZ have to be seen to be doing the right thing to assist and help the painful recovery from the earthquake disaster.
A 0.25% or 0.50% cut in the OCR on March 10th has to be viewed as symbolic and psychological only, as the reality is that the banks’ cost of funds will not automatically reduce with the OCR decrease.
Bank base lending rates to small and medium business borrowers are unlikely to change.
However, there will be public/government pressure on the banks to be doing their bit to assist these businesses in a time of crisis.
A further easing of monetary policy now, near to a time when the markets were expecting the RBNZ to start removing the emergency monetary stimulus put in place in March 2009, has to be negative for the NZD.
Unsurprisingly, the NZ dollar was immediately sold in the FX markets when the quake headlines hit the newswires last Tuesday.
It was a natural reaction to sell the Kiwi down 1½ cents to 0.7450 on the news as international currency market participants speculated on the implications for the economy.
The NZD has stabilised around 0.7500 since the initial selling; however it is instructive that the NZD has been unable to follow the AUD higher against the USD over recent days.
As a consequence, the NZD/AUD cross-rate has dropped to new lows of 0.7380. The overall Trade Weighted Index (TWI) has decreased from 67.70 before the quake to below 66.30.
Over coming months and years the "New Zealand specific" forces on the NZD exchange rate direction may be assessed as follows:-
- "Lower for longer" interest rates in 2011, due to the earthquake disaster, postpone any individual NZD strength until 2012.
- Provided agricultural export commodity prices hold their recent gains, 2012 could be a big years in economic growth terms, thus increasing interest rates and currency value in 2012.
- Massive offshore reinsurance payments for the Christchurch re-build coming into New Zealand later this year and 21012 are NZ dollar positive, as the Kiwi dollars have to be purchased across the FX markets. The billions of one-off payments will reduce the Balance of Payments deficit from 3% to 1% of GDP.
- International share and bond investors abandoning their NZ holdings as a result of the quake are unlikely. The second largest holder of NZ Government Bonds, US fund manager Loomis Sayles, are reported as wanting to buy more NZ bonds if the currency comes off another 5% to 10%. Daiwa Asset Management is the largest holder of NZ Government bonds.
The upcoming "global" forces on the NZD/USD rate are more difficult to predict with accuracy, however they may be summarised as follows:-
- Comparative economic fundamentals between Europe and the US suggest a EUR/USD exchange rate at $1.2000, not the current $1.3750. A stronger USD this year should pull the NZD/USD rate to below 0.7000.
- Stronger US employment and ISM data over coming months is USD positive.
- The Chinese leadership is worried about increases in inflation (food and housing prices) and seems likely to tighten monetary policy a lot further. Eventually a slowdown in Chinese demand has to be negative for sky-rocketing hard commodity prices and the Australian dollar.
The NZD/USD exchange rate does follow the AUD/USD and EUR/USD rates closely, so the implications are obvious.
The Christchurch earthquake has changed the timing of the forecast NZ dip and recovery; however the overall pattern remains the same.
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* Roger J Kerr runs Asia Pacific Risk Management. 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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