Roger J Kerr says 2019 featured a misreading of the fundamentals by most economic forecasters and 2020 should be more positive for the NZD as the greenback weakens, moving the Kiwi dollar towards 70 USc

 Roger J Kerr says 2019 featured a misreading of the fundamentals by most economic forecasters and 2020 should be more positive for the NZD as the greenback weakens, moving the Kiwi dollar towards 70 USc

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.

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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. 

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26 Comments

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Another good year. Enjoyed your articles in 2019, cheers.

Go Roger. You tell 'em boy. The DGM's will be out in force again next year. They always are. And the Fed just keeps growing the balance sheet in huge measure by anyone's standards. I don't know exactly how this game plan ends, but let's make hay while the sun's still shining.

Gold appreciated approx 17% against NZD in 2019. If that means anything to anyone.

Gold increasing in value doesn’t mean the NZD is losing value. If you want to know how the NZD is doing look at the TWI and the basket of goods used for the CPI.

Gold increasing in value doesn’t mean the NZD is losing value

Yes it does mean NZD lost value......against gold. It has been losing value consistently on an annual basis for quite some time.

The NZD gained value against Aluminium. Oh bother, how can we tell if has weakened or strengthened given that it went up against one metal but down against another? If only there was a way we could assess its value against a broad spectrum of commonly purchased goods, commodities and other currencies to know for sure. I guess we’ll never know.

“Losing value” is very different to “losing value against gold”.

“It has been losing value consistently on an annual basis for quite some time. No it hasn’t. Because gold is not the measure of the NZD.

Because gold is not the measure of the NZD.

Huh? Any currency can be measured against gold. In fact, it's quite a useful benchmark as gold is considered by many as a "store of value", including central banks.

The value of anything can be compared to anything. Gold has gone up for various reasons, including international risk, but this doesn’t mean that the NZD is weaker as a currency. Gold alone isn’t a good benchmark for the overall strength of the NZD. The commodity graph linked above is to a greater extent. Better yet is the TWI and CPI.

The value of anything can be compared to anything. Gold has gone up for various reasons, including international risk, but this doesn’t mean that the NZD is weaker as a currency.

Gold is a useful benchmark to determine relative appreciation or depreciation of currencies. The gold price has hit all times in the currencies of most developed countries in 2019, except the USD.

Gold alone isn’t a good benchmark for the overall strength of the NZD. The commodity graph linked above is to a greater extent. Better yet is the TWI and CPI.

The value of the NZD has been primarily been determined by appetite for risk as it is a "commodity currency". For that very reason, AUD and NZD were smashed during the GFC, particularly against JPY as it was a source currency for the carry trade. The TWI was smashed on the onset of the GFC and sits at similar levels now before the GFC hit.

You’ll need to justify your position better than that. All you’ve done is state your opinion without anything to back it up.

The purchasing power of the NZD (TWI/CPI/Commodities Index) is what determines its strength or weakness. It’s value in relation to gold simply does not tell you this, instead it only tells you its purchasing power for gold. If the NZD’s purchasing power remains the same, but the value of gold goes up, it isn’t correct to to say that the NZD has weakened. It has weakened in relation to gold (and strengthened relative to other metals), but it is overall purchasing power that matters.

You might‘ve been right if we were living a century ago before the gold standard was abolished, or before then when it was used as currency. Gold is still an important metal today, but you don’t seem to understand why.

It has weakened in relation to gold (and strengthened relative to other metals), but it is overall purchasing power that matters.

All currencies have weakened in relation to hold in 2019, including NZD. Question is to why this has happened if the currency's value is strong relative to other currencies.

You might‘ve been right if we were living a century ago before the gold standard was abolished, or before then when it was used as currency. Gold is still an important metal today, but you don’t seem to understand why.

The question as to whether gold is currency is not is beside the point (some people will argue that it is). Gold is "currency" to many people and definitely a "store of value". But more importantly, it can be used to measure to measure both short and long-term decline 'purchasing power'.

But more importantly, it can be used to measure to measure both short and long-term decline 'purchasing power'.

Wrong, particularly in the short term. The NZD weakened less than a couple % against goods/services and other currencies. But gold was up 17% against the NZD. Has the NZD’s purchasing power gone down by less 2% or 17%? Here’s a clue - if the NZD’s purchasing power had plummeted 17% in one year it would’ve made the news and we’d all be at panic stations.

The NZD weakened less than a couple % against goods/services and other currencies.

OK, over P12M JPY/NZD has appreciated approx 1.7%. But if you look at the volatility over that 12 month period, you would only be waving your pom poms from Sept.

Has the NZD’s purchasing power gone down by less 2% or 17%?

Relative to gold, yes, its purchasing power has fallen 17% in P12M.

You claim gold “can be used to measure both short and long-term decline purchasing power”. Gold has risen 17% against the NZD last year. Therefore, unless you want to contradict yourself, you think the purchasing power of the NZD has dropped an eye-watering 17% this year. Laughable. Merry Xmas, I hope you’ve learned something today.

Therefore, unless you want to contradict yourself, you think the purchasing power of the NZD has dropped an eye-watering 17% this year.

Relatively speaking, yes, you can say that the purchasing power of NZD relative to gold has fallen 17%. Yes. But waving pom poms because NZD has not underperformed against a basket of currencies weighted for trade fails to account for the reality that most forex trade in NZD is not for trade purposes.

I didn’t say purchasing power relative to gold and neither did you - see your sentence quoted above. You just said it is a measure of purchasing power. The value of gold in NZD is not a measure of NZD’s overall strength and purchasing power, but only a measure of its purchasing power relative to gold (which is just stating the obvious).

only a measure of its purchasing power relative to gold

Correct. You can even make inferences on that if you like. For ex, JPY has depreciated approx 15% against gold YTD and NZD approx 16.4% at today's rate. What you going to infer about the value of JPY to NZD in 2019 based on the gold price?

Annual export income (2018) = NZ$80,000,000,000 (average NZD/USD = around 0.6500)

Annual export income (2018) per Roger's cheer-leading NZD/USD @ 0.7000 = NZ$74,300,000,000
so loss to NZD income is NZ$5.7 billion dollars with our higher dollar.

Annual export income (2018) with a more realistic valuation (on basis of Peter Lyon's, Herald economics commentator), of NZD at say 0.6000 = NZ$108,000,000,000

So, future annual loss of income in NZD by having Roger's overvalued dollar = NZ$33.7 Billion

Funnily enough, annual national income required to support the housing market at this overall valuation is around $140-$180B NZD

Streetwise - I get what you are saying but there is a massive difference for the import side of raw materials/machinery etc when the dollar has a higher value that is part of the calculation of a fair dollar value ! Season's greeting !

Hi Shoreman - it doesn't matter because as a successful trading nation we should be aiming to export more value than we import. Also as NZD reduces in value to USD it should encourage more import substitution by manufacturing goods in NZ instead of importing them. Besides, we need more low-skill manufacturing jobs to mop up that large proportion of our young population that our education system is failing to upskill to a level needed for high-tech industry,etc.
Have a happy New Year.

I'm not so bullish,

Brexit has only just begun - everyone has been jumping up and down like it's all sown up - in reality negotiations are only just beginning and it's not going to be pretty.

Commodity price indeed is at historic highs - what happens when it drops back?

All major economies are decelerating. Advice for cooking frogs comes to mind - just because no one's jumping out of the pot just yet doesn't mean the waters not getting hot...

Locally interest rates are ticking up again (if only slightly) - what happens to the housing market when Joe average realises interest rates aren't going to keep falling for ever?

Is this a joke? Or just tailored to the uninformed.

.

So Roger was wrong for half the year and approaching correct towards the end of the year and he wants to crow and blow his own trumpet? Yeah. Nah.