Roger J Kerr says while many commentators continue to be negative on the outlook for the NZ economy, the picture changes dramatically if China and the US can settle a trade agreement

Roger J Kerr says while many commentators continue to be negative on the outlook for the NZ economy, the picture changes dramatically if China and the US can settle a trade agreement

The Kiwi dollar has held its ground at 0.6300 against the USD, despite further US dollar strength globally over recent weeks.

The USD gains due to increased geo-political tensions in the Middle East and general “risk-off” sentiment in investment markets as a result of continuing Brexit shenanigans and impeachment proceedings against President Trump.

Weak economic data in Europe with the German economy heading for recession has weighed on the value of the Euro currency and thus has prevented the USD dollar from losing ground due to US interest rate cuts.

The EUR/USD rate has traded to a low of $1.0900 from previous levels around $1.1100.

Over the last week the Kiwi dollar has outperformed other currencies against the USD, resulting in the cross-rates against the Aussie dollar, Yen, Pound Sterling and Euro all lifting off their low points of two weeks ago.

There may be signs that the speculative Kiwi dollar selling (that drove the NZD/USD rate to below 0.6300 after the surprise 0.50% OCR interest rate cut in early August) is becoming exhausted as the punters are not prepared to add to their short-sold NZD positions at these levels. However, we have not had any particular positive news or developments to encourage sustained NZ dollar buying.

Lower business confidence will not be positive for the Kiwi

Whilst local business confidence has been depressed for some time now, releases of the monthly ANZ and quarterly NZIER business confidence measures on Monday 30th September and Tuesday 1st October respectively, are likely to send the Kiwi temporarily lower as the sentiment indices sink lower again.

The latest Rabobank farming confidence survey was also sharply lower despite sheep meat prices being at record highs.

Many farmers obviously feeling singled out and under attack from the Government with water and carbon emissions policies.

The ongoing saga of the trade wars between China and the US is also eroding local business confidence and business investment.

However, to be frank the New Zealand economy has not suffered any widespread negative impact from this over the last 12 months.

Manufacturing activity and forward orders are certainly lower as measured by the PMI index, being the one area of the NZ economy that the uncertainty of the trade wars has impacted negatively with expansion on hold and supply chains disrupted globally.

A trade deal is still possible

There have been too many false starts of progress towards a trade agreement between China and the US over recent months to have any great confidence that the next scheduled meeting on 10th October will be any different.

However, falling consumer confidence levels in the US will be reminding Donald Trump and his trade negotiators that the tariffs are hurting the US economy as much as being detrimental to parts of the Chinese economy.

The motivation of both sides to reach agreement on the sticky points of technology transfer and intellectual property ownership must higher today than ever before.

Another low monthly US employment figure on Friday 4th October (a jobs increase less than 140,000) will be further evidence to the Trump camp that the tariffs are weakening the US economy.

The probability of the US economy sliding into recession is still hotly debated, however Trump will be under increasing pressure to do a deal with the Chinese to reduce the economic recession risk.

The view that both the NZ dollar and Aussie dollar will appreciate on any sort of positive progress towards a trade agreement still holds as a lot of uncertainty in the world would be lifted.

Lower Aussie interest rates already built into the AUD/USD exchange rate

The Reserve Bank of Australia is expected to cut their interest rates by another 0.25% to 0.75% on Tuesday 1st October as they continue to see their unemployment rate of 5.3% as well above their target of 4.5%.

Current economic trends in Australia would suggest that their unemployment rate will reduce over coming months, however there is always a substantial time lag form a pick-up in activity to more permanent jobs flowing.

At levels between 0.6750 and 0.6800 the AUD/USD exchange rate has already priced-in the interest rate decrease, therefore the FX market focus will be on the RBA’s future guidance on how many more rate reductions will be required.

The improvement in the Aussie economy over recent months does suggest that the RBA will not be as bearish on the outlook as they have been previously. The AUD/USD rate has stabilised over recent weeks and further depreciation as a result of the OCR cut is not expected.

Very positive NZ economic conditions if a trade deal can be agreed

Whilst many commentators continue to be negative on the outlook for the NZ economy, the picture changes dramatically if China and the US can settle a trade agreement.

The economic conditions are already very favourable with high export commodity prices, super low interest rates, a much lower currency value and the Government in a healthy financial position to expand fiscal policy.

Business confidence and investment would turn around sharply when the cloud that is the trade wars is lifted.

Under that scenario the outlook for the Kiwi Dollar also become much more positive.

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*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981. 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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13 Comments

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It seems somewhat remiss in a commentary about prospects for the NZ economy to exclude the effects of the cooling property market and the Chinese capital controls.

In my view, irrespective of the outcome of the trade talks, NZ is in for a tough time while we see Auckland house prices adjust to local income levels.

We are already seeing multi year lows in volumes, stock of new builds rising, developers and tradies going under, banks rolling back credit appetite etc. This is before the completion of all these new apartment blocks in the CBD where units have been presold to oseas Chinese who may not be willing or able to get funds through to complete the purchases.

These overly optimistic commentaries aren't helpful, let's tell the real story.

Indeed. Real estate impact usually not figured in and borrowing- creation of leveraged debt - ditto. Esp when falling

Motivation must be higher.
No I do not think so.
Heard this repeatedly as it’s deteriorated
gdp now 40% lower than treasury forecast in 2017 but you continue to ignore trend. Also lending figs show nil growth in % terms in last year

Another bizarre commentry...

What happens to the Kiwi if the trade war continues/worsens?
What if the RBA indicates further moves to the downside and QE is coming?
What happens to the Kiwi if the global econmy slides further - how can that be a positive?

Whilst it's great to be a cheerleader for the upside - would be helpful in this type of article to accurately discuss downsize risk/levels for the Kiwi - if things down turn up rosy etc.

I mean let's face it - when gossip is occuring that the US is going to stop Chinese equity listings on US markets and effectlively create barrier to US investment into China - sort of indicates that the trade war scenario is far from over.

In terms of value investing, I think there’s actually a good buying opportunity for good quality, beaten down Chinese stocks here. Seems better value than the overall US market, with a good long term outlook. There is risk but I think the market could way overreact on the downside. There’s a lot of upside to solid and growing Chinese companies, especially those that have revenue mostly from Asia. I really doubt they’ll restrict investment of Chinese stocks. The big hedge funds have significant investments there.

Is it some are just eyes shut to world tensions, never thinking beyond their own spreadsheets? This is not a trade war...this is a cold war. The dominance of the US is under challenge, we will not not revert to bau.

Agreed rastus
This is not just about trade (balancing exports and imports) between the two countries. The US has mooted moves to de-listing Chinese companies on the US exchange and preventing US companies listing in China, and recent development of coral atolls to form military bases in the north Pacific and the consequential tensions, are just two indications that it more than just trade imbalances.
It is more to do with containing the growth and expansion of China - the Belt Road and increasing presence in the Pacific (e.g. Vanuatu's new parliament buildings, military aid to Fiji) are examples of this. And even we are getting involved; the increase in "aid" by NZ to Pacific nations and recent visits by Jacinda - and Scott Morrison - to Pacific Island nations are a long period of neglect are examples of a reaction to this growing Chinese presence in the Pacific.
All of this this is about an increasing wider geo-political tensions that are not going to go away with a simplistic settlement of a trade agreement. As the article notes, there is pressure on Trump to get some agreement on trade tariffs to avoid the economic consequences for the US economy affecting his re-election chances, but this will not solve the underlying geo-political issues.

Correct rastas - we won’t return to bau. Apart from the trade war with China Trump is also at war with Russia and Iran, he’s also taking on the political and financial elites plan for world government, world currency (SDRS), & world taxes. Make no mistake, The BRICS nations led by China and Russia (with their closer economic ties) plan to dethrone the US dollar thereby weakening the US.

Tend to agree.

If RJK is still long the kiwi he must be hurting. Close them out FGS.

I'd suggest Trump will settle the Trade War, not sure it will matter. As the big doubt I have is Trump's impeachment and its impact on the markets and then the 2020 elections. I kind of Suspect we'll have Elizabeth Warren complete with fire and Brimstone raining down which will panic the markets into a Greater Depression if it has not already happened.

I think the trade war is something of a political construct to benefit financial speculators more than we realise. Each time Trumpy blows up on twitter it triggers the market algorythms and causes a downward correction in prices which gets reversed within days as prices increase, it happens regularly. So someone must be making some good money out of this manufactured instability....

a thought on business confidence...how can WE HAVE ANY CONFIDENCE IN THEM? Our companies are notorious for not investing in efficiency during the flush times in so much they can be well positioned in difficult times to be competitive. Time and time again...post 87 crash, post asian economic crisis slump 98, post dotcom slump 2000, post gfc collapse 2008 and now post decade of National Party economic mismanagement and neglect, slump 2016 onwards...these companies create their own failure and we sustain it by stupid subsidies such as low value immigration and WFF and other corporate welfare. We should expect better from our business community...THEY need to deliver better results.