In currency direction and movement terms, the year of 2019 will be remembered as a period when the NZ dollar dramatically diverged away from its economic fundamentals (export commodity prices in particular). The similarities of the 2019 NZD/USD rate movements to what occurred the year before in 2018 is also telling. In 2018, global “risk-off” investor sentiment, largely due to the looming trade wars between China and the US, caused the US dollar to strengthen and currency speculators sold currencies like the NZ dollar against the USD as it was viewed our economy would suffer more in that deteriorating international trade/economic environment. The NZ dollar depreciated 10 cents against the USD in 2018 from 0.7400 to a low of 0.6400 by October 2018. As it turned out, the NZ economy proved to be more robust against the expected global “headwinds” and by the end of 2018 stronger than forecast GDP growth caused the RBNZ and others to abandon their negative economic forecasts. The Kiwi rebounded to 0.6900 in early 2019 as speculative short-sold NZD position were unwound.
According to the iconic 1981 Split Enz song “History Never Repeats”, however that is exactly what did not happen to the Kiwi dollar in 2019, the movements against the USD erringly mirrored the 2018 pattern.
And despite agriculture export commodity prices rising through the year, RBNZ and bank economic forecasters yet again painted a gloomy picture for our economy. They confidently cited the Auckland property market weakness and global risks such as the trade wars and Brexit as causing the economy to stumble and stall towards a much lower growth performance and possibly into recession. Local business confidence plunged further into the abyss as many business owners and managers obviously believed the forecasts of a much weaker economy. The negativity culminated in the RBNZ cutting the OCR interest rate in August by 0.50%, sending an almost panic signal that the economy was in deep trouble.
Offshore currency speculators backed the weaker NZ economy view of the RBNZ and the bank economists and sold the Kiwi down 7½ cents over the year from 0.6900 to a low 0.6250 in early October. A deliberate devaluing of the Chinese Yuan as a counter-measure to US import tariffs for Chinese product also played a part this year as the AUD and NZD currencies follow the Yuan.
Yet again, as GDP growth and other economic data have proven the economy did not slow-up in 2019 to the extent widely forecast, the currency punters have been forced to unwind their short-sold NZD positions, sending the NZD/USD rate up sharply over the last three months to 0.6600. Business confidence has improved over the last two months as the RBNZ reversed their extreme dovish August view to a much more positive economic outlook in their November monetary policy statement. Some of the banks have also been forced to abruptly reverse their NZD/USD rate forecasts from below 0.6000 to above 0.6500.
As an eventful year draws to a close, the NZ economy is in great shape with still high export commodity prices and a property markets on the rise again after a very modest correction. Regular readers of this weekly column will recall that we never bought into the “stalling NZ economy” scenario and therefore viewed the Kiwi dollar as over-sold and undervalued at exchange rates below 0.6500.
The currency speculators sold it down well below 0.6500, however yet again they have been burnt by following the gloomy economic forecasts that have been subsequently proven to be inaccurate.
Looking ahead: 2020 economic picture refreshingly clearer
The first matter to contemplate when projecting likely NZD/USD exchange rate movements in 2020 is that the currency speculators will not be selling the NZ dollar by blindly following negative RBNZ and local bank economic forecasts that have proven to be well wide of the mark in 2019.
From the current rate of 0.6600 the downside risks for the Kiwi dollar appear limited, whereas the upside has potential with a stronger global economy and a return to economic fundamentals as the main driver.
The Brexit and trade war issues have been partially resolved and these risks are thus disappearing. Global economic growth forecasts will start to be revised upwards instead of downwards.
The changing international economic landscape is good news for growth/commodity currencies (NZD and AUD) and negative for the USD as the safe-haven FX trades of the last two years are unwound.
Unfortunately for the Australians, climatic risks have conspired against them with drought and now horrific bush fires adversely impacting on their otherwise recovering economy.
The NZD/USD exchange rate can be expected to be more heavily influenced by the USD side of the currency pair in 2020. Over recent years the Americans have operated a loose fiscal policy (resulting in the large and growing internal budget deficit) and relatively tighter monetary policy compared to Europe and the rest of the world. The European economic policy settings have been the opposite, very loose monetary policy and relatively tight fiscal policy. Since the Federal Reserve reversed their previous tightening bias with interest rate cuts in mid-2109, US monetary policy is no longer so differentiated to the rest of the world. The previous short supply of US dollars will turn the other way in 2020.
Potential political risk in the US and New Zealand (US Presidential and NZ General Election in November 2020) will start to enter people’s minds, however I would not see these events influencing currency values too much over the next six to nine months.
There is no justification for lower NZ interest rates in the current economic outlook, therefore that factor is removed as an NZD negative.
The local New Zealand variables (economy and commodity prices) are positive for the NZD, coupled with a weaker US dollar on the global stage, paints a picture of an NZD/USD rate nearer to 0.7000.
*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.