The rollercoaster ride for the Kiwi dollar continues with the recovery up to 0.6680 against the USD over the last two weeks, giving way to a concerted wave of NZD selling over recent days. The NZD/USD exchange has been abruptly returned to the previous lows of 0.6500 reached at the end of May.
Three factors were behind this latest Kiwi dollar sell-off and whether the currency depreciation continues will depend upon whether these negative influences are sustainable, or not: -
- Australian employment data for May was interpreted by the markets as supporting further interest rate cuts by the RBA sooner rather than later. Despite an increase of jobs of over 40,000 for the month, the unemployment rate increased from 5.1% to 5.2%. The RBA have clearly stated that they will continue to cut interest rates unless the unemployment rate falls and that in turn lifts wages. The AUD dropped from the 0.6960 area to 0.6870 as a result, the Kiwi following the AUD down in the forex markets.
- New Zealand’s manufacturing PMI survey results for May were very poor, the index dropping from 52.7 in April to 50.2. The index is now at its lowest level since December 2012. The re-escalation of the trade wars between China and the US during the month would have dented local manufacturer’s confidence about global demand for their products as many business investment decisions around the world are just put on hold.
- The attacks on oil tankers in the Strait of Hormuz has heightened global geo-political risks, causing the US dollar to strengthen against all currencies. The EUR/USD rate reversing down from $1.1330 to $1.1200 On Friday 14th June. The Kiwi and the Aussie dollars always suffer when investment markets jump into “risk-off” mode.
The Kiwi dollar has bounced back up from the 0.6500 area on two previous occasions over the last twelve months.
Can it repeat that price pattern?
In the very short-term the NZ GDP growth figures for the March quarter scheduled to be released on Thursday 20th June may well be the determinant of whether the Kiwi can recover back upwards once again.
Consensus forecasts are for a 0.60% increase over the quarter, however reasonably strong expansion in retail sales, exports and wholesale trade could well push the number above +0.60%.
The likely detractor to positive growth in the economy will be the construction sector, which has severe capacity constraints and cannot expand any further.
A GDP result below 0.60% will send the Kiwi lower.
However, it could well be shaping up to be a very similar situation to last September when a surprisingly strong 1.00% increase in the GDP for the June 2018 quarter reversed the Kiwi dollar upwards from 0.6500 at the time.
A stronger than expected GDP outcome will cause many to pause and re-think the widespread view that the NZ economy is spluttering and stalling in 2019.
Fed meeting this week, G20 meetings next week
The financial markets do not expect the US Federal Reserve to cut their interest rates at the FOMC meeting this week, however they are very confident that there will be a reduction next month.
The US dollar could come under renewed downward pressure if the Fed rhetoric and economic projections point to the timing and extent of interest rate cuts over coming months.
The Fed will not be enjoying the situation that they are seemingly bowing to pressure from President Trump and the equity markets to cut interest rates when they increased the Fed Fund’s interest rate only six months ago.
Another month of weaker US economic data will however provide the Fed with sufficient evidence to justify a series of interest rate decreases.
There is no question that the costs and uncertainty for US businesses caused by the trade wars is now feeding through into weaker US economic data (thus supporting interest rate reductions).
The fate of the Kiwi dollar over coming weeks hinges squarely on what happens at the G20 leaders meeting in Osaka, Japan on 28th June.
It would be very positive for the NZ dollar if President Trump and Chinese Premier Xi Jinping have a harmonious meeting, agree to re-start their trade negotiations and the US hold back on introducing further tariffs.
On the other hand, should a meeting not occur between the Chinese and US leaders or there is nothing positive from their meeting and the US implement the next wave of tariffs, the Kiwi dollar will be sold lower.
The outcome is binary.
The US authorities do not want a stronger US dollar, however what the US import tariffs do is they force an equivalent percentage devaluation of the currency where the imports are sourced from (the Chinese Yuan).
Exchange rates, being relative prices, are always the automatic shock-absorber for maintaining a country’s international competitiveness.
Chinese goods exported to the US become less price competitive in the US retail stores because of the tariff costs, therefore the Yuan/USD exchange rate adjusts to compensate that loss of competitiveness.
The NZ dollar and Australian dollar also weaken as our economies are heavily dependent on China and over recent months we have followed the Yuan lower against the USD.
The Chinese will, however, not allow the Yuan to weaken further above CNY7.0000 ahead of the 28th June meeting so that they are not accused by Trump of being currency manipulators.
*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.