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Roger J Kerr says the economic prospects have now changed positively enough for the Government to pull back from picking winners to prevent the longterm distortions that would impose

Roger J Kerr says the economic prospects have now changed positively enough for the Government to pull back from picking winners to prevent the longterm distortions that would impose
Time to let the crews make their own decisions again

Summary of key points: -

  • Current Kiwi dollar correlation to the Dow Jones Index likely to be temporary.
  • Stabilisation of the NZD/USD rate at 0.6000 will not last long according to the technicals.
  • NZ share market performance defies doom and gloom from economists.
  • Time for the medico’s and politicians to stand aside and let the business entrepreneurs get on with it.

Equity markets response to US company earnings releases key for the Kiwi dollar

The “risk-on/risk-off” investment market sentiment and appitite that has been the main driver of the NZ dollar movements over recent weeks since the Covid-19 pandemic hit the global economy in March, is starting to reduce in intensity as a determinign factor. Equity markets remain vulnerable, however overall the markets are settling and volatility reducing.

Extreme over supply and collapased demand has caused some scary pressure points in the crude oil market, however those gyrations have not impacted too much on currency movements.

The substantial reduction in the oil price does mean that the amount of US dollars that oil importing countries have to buy across the forex markets is considerably less. A lower oil-related demand for USD’s should be negative for its currency value.

The vulnerability of the US equity markets to another major sell-off has centred around the release of decimated 2020 corporate earnings. If the reduction in profits and size of the losses are a lot worse than what the equity markets are currently pricing, the sellers will hold sway. The next week sees a large number of US listed companies reporting their earnings from Caterpillar to Amazon. It should not be a surprise to the markets that many sectors will be a sea of red ink (oil, hospitality, transport, manufacturing), however many others will not be so hard hit (technology, pharmaceutical, health). The risk of another large leg down in US equity markets, that would send the NZD/USD exchange rate lower, appears to be dissipating as we have not seen any concerted selling ahead of these crucial earnings annoucements.

While there has been a very close correlation between the movements of the Dow Jones Index and the NZD/USD exchange rate over the period since 19 February when the share markets tanked and the Kiwi plummeted in unison to 0.5500, history tells us that there are very long periods when the NZ dollar is not driven by equity market sentiment (refer first chart below).

Commodity prices, monetary policy changes, economic performance and appreciation/depreciation of the US dollar itself against all currencies (particularly the AUD and EUR) are more influential variables. If the Dow Jones Index settles around the 24,000 region over coming months, the NZD/USD exchange rate direction will return to being determined by the other drivers, as has been the case for most of the last ten years.

Short-term crunch point ahead for the NZD/USD rate

Another week in the NZ dollar FX market, another pull-back lower into the 0.5900’s and instructively another recovery back above 0.6000.

As the second chart below depicts, the converging triangle pricing formation indicates that the Kiwi is headed for a break-out higher if it trades above 0.6050 and is at risk to lower levels if it trades down below 0.5950 and 0.5900. Gains to above 0.6200 would see the Kiwi trading above its 90-day moving average and from a technical perspective, short NZD position holders would have a signal to buy their Kiwi back.

It seems that local USD exporters who were not bold, quick or organised enough to sell USD/buy NZD as future hedges during the brief dip to 0.5600/0.5700 from 20 to 23 March, now have larger orders placed to buy the Kiwi between 0.5600 and 0.5900. A failure of the NZD/USD rate to return to those lower levels over coming weeks may well see the FOMO (Fear of Missing Out) syndrome kicking in and the exporters entering hedges off higher spot rates.

The Kiwi dollar has held its value fairly well over the last week in an environment where the USD has strengthened from $1.0900 to below $1.0800 against the Euro. The EUR/USD exchange rate is very much in the bottom-end of its trading range at $1.0800 and the probability has to be higher for a move back upwards (weaker USD) from here given the bazooka USD money printing by the Federal Reserve.

Investment markets more optimistic on the future than economists

A number of weeks ago this column highligted the three potential NZ economic scenarios for the recovery (or not) from the Covid-19 pandemic. A month ago the panic equity market sell-off suggested an economic outcome somewhere between the “U” and “L” shaped recoveries.

The rapid recovery of the equity markets from the abyss (and thus the Kiwi dollar) over recent weeks may now suggest an economic recovery between the “V” and “U” shaped scenarios. Admittedely, this will not be the case for the tourism, travel and hospitality industries. However, China is back to work and very soon Australia and New Zealand will largely be back to work. For this reasons it is difficult to be negative on the NZ dollar outlook, as in relative terms we are just so far ahead in the recovery stakes than Europe and the US.

Australia and New Zealand are being recognised and admired by the rest of the world for how we have taken tough decisions to control the pandemic and thus reduce its longer-term economic impact.

In my view, it is always preferable to take more note of what the financia/investment markets are telling us about likely future economic conditions than what economists and politicians are telling us.

The NZ equity market and the potentially the NZ dollar FX market are not pricing-in a prolonged economic recession. However, here in New Zealand there appears to be a weird competition amongst the various economists as to who can have the most doom and gloom in their forecasts for unemployment and GDP growth. One prominent “media economist” who has predicted an economic downturn every year for the last ten years (and has been totally wrong!) now has his day in the sun – however not for the reasons he based his previous forecasts on. 

Next economic phase requires less State involvement, not more

A potential inhibitor of the NZ economic recovery over coming months is that the Government themselves, who has had a taste of calling the shots as to what industries/companies can operate and who cannot, carry on with excessive State partcipation and intervention in the economy.

Many commentators and business leaders believe we require a different economy going forward (effetively replacing the decimated tourism sector). However, that new economic activity will come from entreprenurs and risk takers, not politicians and bureaucrates in Wellington. Therefore is was disappointing (but hardly suprising) that the Prime Minister responded with a idealogically driven “No” last week to a question about innovative policies to attract international bilionaires to New Zealand to establish new businesses and thus jobs. New Zealand has a unique opportunity to sell itself as a safe-haven sanctuary for global businesses – a “Switzerland of the South Pacific”. The Government’s role in the new economy is to enact the policies to allow the private sector to make their own decisions and get on with it.

It is near time for the medico’s, politicians and bureaucrats to step aside and allow our innovative and smart business entrpreneurs shape the new economy with private capital from whereever we can get it. Otherwise, we will all be burdened with the responsibility of sending our grandchilren the massive bill for the current economic rescue (Government and private sector debt). 


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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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31 Comments

13
up

'It is near time for the medico’s, politicians and bureaucrats to step aside and allow our innovative and smart business entrpreneurs shape the new economy with private capital from whereever we can get it. Otherwise, we will all be burdened with the responsibility of sending our grandchilren the massive bill for the current economic rescue (Government and private sector debt)'

Isn't that what we've done post GFC - and all that happened was foreign money created asset bubbles and as a result caused NZ's private debt levels to stay at all time highs? (i.e. you want into the housing market, to compete with foreign capital, here's a massive mortgage).

I think that trying to do what we were doing and expecting different outcomes is as someone famous said, madness.

14
up

Spot on. All these old money guys haven't looked out the window to see the different world. And it's got a lot of changing to do yet.

Agreed...This last four/five weeks is the calm before the storm.

When the government give out $7,000 to each subsidised worker, what can you expect. The sad thing I saw first hand was one of my new tenants buying new curtains when there was nothing wrong with the old ones. Now they are a week or two behind in rent.

Most of this $7,000 handed out will get wasted, as most do not know how to manage or look after money. It seems to burn a hole in their pockets. I view it as the first stage of an election bribe. The way more sensible thing to do would have weekly or fortnightly installments, consistent with wage payments; to ensure people do budget. Maybe most of the $7,000 went on loan payments, and now that is gone the same people are cluing up for food parcels; that I have kindly dropped off.

If we only had a strong opposition, to hold government to account; rather than the wet lettuce Simon Bridges.

While my tenant issues are a micro problem, they are systematic of macro problems; and related to the ease with which one can borrow money.

Borrowing money is fine, only if the profit is circulated locally; which mostly they are not and therefore these loans only become a cost. Nationalise our banking system; which could happen anyway through this meltdown, will solve most of NZ inc problems.

A lower oil-related demand for USD’s should be negative for its currency value.

But it's not, therefore think of something else.

This note reviews the recent events in FX swap markets in the context of the longer-term trends in the demand for dollars from institutional investors. We show in particular that the dollar exchange rate takes on the attributes of a risk capacity indicator for the banking sector. This reflects the tendency for an appreciating US dollar to dampen dealer banks’ intermediation capacity. For this reason, the dollar exchange rate and dollar funding costs tend to move in lock-step, as they did during the recent bout of turbulence. Link

US Banks Are Pulling Back From Lending To European Companies: FT

13
up

You know what you can do with the overseas billionaires.
Slow and steady wins the race, this boom n bust b.s. has to stop and i think kiwis are fast realizing that.

Isn’t the boom and bust cycle what regulates the market? The risk of losing capital regulates the demand for return. Are you suggesting controls? Should the market not be left to find it’s own level?

The market is a crowd of ignorant lemmings, trying to out-guess each other while doing zero in real productive terms. For a while it could hide it's 'make money out of nothing' approach, passing it off as 'investing', but it was all parasitic on people doing real stuff.

That has just changed. Real stuff way over 99% fossil-fuel-driven - so you can count for yourself how much less is being done. Too many parasites, not enough real work.

Game over.

Here's something I cannot find an answer for

The S&P 500 has seen a rally , but I have scrolled through the list of 500 and there are a lot of oil, gas and related US Energy companies in the list , not to mention travel related businesses , etc

These should be weighing down the index , but they are not .

Why ?

Kinda makes me sick that I missed that rally. 30% gains in 4 weeks! I guess return on capital isn't the most important thing in life right now. But then again, as the fictional Monty Burns once said "I'd trade it all... for just a little more"

18
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Lets stop chasing more and more money at the expense of social cohesion and the environment and just enjoy what we already have. We live in a beautiful safe country and we were happier before. Its like the high flying stressed out businessman who works all year, long hours, long commutes, for an egotistical boss whom he hates, just to be able to go on his two week holiday in paradise. When he gets there he meets a local guy who rents out deckchairs, is paid not much at all but is relaxed, content and happy living in that paradise for 52 weeks of the year. Who is the fool?

Agree completely, well said.

“The cost of a thing is the amount of what I will call life which is required to be exchanged for it, immediately or in the long run.”

"A man is rich in proportion to the number of things he can afford to let alone."

― Henry David Thoreau, Walden

You, for ignoring that the country where the guy rents out deck chairs for a living probably can't afford a modern hospital.

I can honestly say I have never envied the people that work at the holiday resorts I have been to.

You're probably going to the wrong ones!

yeah..and guarantee the deck chair guy is on the benefit paid for by the hard worker. You don't get roads/hospitals/sewer systems built by people renting deck chairs for pittance and not paying any tax. If you have a better system I'm all ears. If you want socialism look back to the 70's in NZ when they taxed people up to 90% for working a second job. NZers left for Aus and the USA by the 100,000s in order to live in a society that rewarded hard work to improve their lot for themselves and their children, and it sent NZ into an economic funk not seen since the 1930's. Hard work provides taxes and infrastructure that improve the lot of everyone, including the lazy deck chair guy. Seriously..Im all ears for you to tell me how I can go camp at the beach the rest of my life and just go fishing. Maybe I sign a piece of paper that says I will not use the roads, go to the hospital or shop at the supermarket?

ASB estimated house price will drop 6% and predicted a fast recovery. So everyone will jump in to make some quick bucks and spend more on used imports BMWs and Barkers clothings

They haven't worked out the real crash is still coming, it doesn't help with the way real estate is talking it up saying banks are free and easy with loans atm.

Tarocash.

All global sharemarkets right now are only the manifestation of central bank stimulunatic psychosis.

All Asia up today: this is the asylum.

When it goes, there will be no bottom for years.

I look around me at the global earnings destruction, then at what these insane share investors are doing, and I have no clue what the hell is going on.

So today's Nikkei gains are the BOJ purchasing ETF's at insane valuations (Bloomberg).

These aren't even markets.

There are no free markets.

The entire world is one huge central bank ponzi scheme.

I refuse to live in such an asylum. When share values are not based on earnings, there's nothing left. Just point your stick into the wind and throw your savings wherever. It's all pointless.

Chuckle.

I have approached things from an entirely different starting-point, but couldn't agree more. I came at finance (which I presumed was populated by people who knew what they were doing) when I realised the amount of energy going into the system could not continue to increase. Indeed, it had to start reducing. Factor in remaining efficiencies physics-wise (on a reducing scale to zero), have a think about 'discretionary' use, then you realise it's game over for underwriting exponentially-increasing debt.

Then look around for financial types who understand, and there's almost nobody. Chris Martenson, Steve Keen, Gail Tveberg and few amateurs who have spotted the flaw. End list.

And, as we see this column, there are those who have had this info repeatedly put under their noses, who still spout the same mantra, unaltered. Growth is good, growth is possible, growth is forever. That's been incorrect for a long time now, the betting per day has out-massed the actual work per day by an ever-increasing amount and the divergence has accelerated, starting in the 70's. No way all those virtual bets were going to be underwritten by a Bounded System like planet Earth.

The next chapter is yet to be written, but it will differ markedly from the last. My bet is Local. Local food, local trading, local community, local travel, local manufacturing (low tech, long-lived and fixable). Energy efficiency will become a near obsession, nutrient recycling likely too.

Good luck to you - interesting times from both our POV'S.

""Then look around for financial types who understand, and there's almost nobody...."" It is great to be one of the select few (mainly amateurs) who understand opposing all those who have spent a lifetime studying hard, passing exams, becoming admired professors, etc who are all wrong. Sort of like being Trump -v- medical science. On the other hand when it comes to climate change caused by CO2 emissions almost all the experts agree. It is so difficult to know when for one subject the experts agree and are right and for another subject the experts agree but are almost universally wrong.

It's because they were counting the wrong things.

Or more accurately, avoiding counting the right things.

The Christian religion had the same problem with Darwin/Wallace/Lyell - they'd convinced themselves we were created 4,000 years ago. Had a whole heirarchy preaching the tale. Dire consequences if you disagreed. On;y troubles was

they were wrong. :)

Well said, MH65. I guess the start of knowing anything is admission of ignorance. Great starting point, wish the politicians had taken that view with Covid. Maybe the masses need to have a virtual reality, a delusion to keep comfortable. Can we cope with the reality?

Lunacy learnt nothing it appears, I'm going fishing tomorrow !!

Great, why did you bother to stop? Lockdown was always unlawful. https://www.franksogilvie.co.nz/news/legality-of-covid-19-measures

Yes - WE need new policies to regulate big corporates in order to start our economy from this paused level.
https://i.stuff.co.nz/business/121180098/coronavirus-questions-raised-ov...

That 'Swizerland of the South Pacific' pitch is getting pretty old although Peter Theil will happily endorse it! BTW...is that the same plan that saw this Country implicated in the Panama Papers by any chance?

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