Summary of key points: -
- The US dollar finally starts to display some weakness.
- New Zealand’s short-term economic decisions.
- New Zealand’s medium-term economic decisions.
Global FX markets start pricing the US dollar down
The Kiwi and Aussie dollars continued their respective recoveries against the US dollar over recent weeks during a period when the US dollar itself was holding firm against the major currencies and showing no signs of weakness.
The global currency market environment has started to change over the last seven days with the US dollar sold aggressively against the Euro for the first time in several weeks. From $1.0800 against the Euro on 26 April, the USD has depreciated to $1.1000.
Global funds and currency traders rushed into the USD in mid-March in a flight to a safe haven currency when the Covid-19 pandemic hit all economies and equity markets tanked.
We are now starting to see the unwinding of those currency trades/positions as it is now realised that the US economy has arguably been more adversely affected than all other economies.
US equities have rebounded due to the massive monetary and fiscal stimulus packages, however Main Street USA is reeling as companies lay-off staff and close up shop.
The Chicago futures contract for the EUR/USD exchange rate has switched dramatically from 100,000 net speculative “long USD” contracts to 100,000 “short-sold USD” contracts over the last six weeks. The speculators are now expecting USD losses.
On top of the extreme deterioration in the US Government budget deficit and debt positions, the Federal Reserve have printed additional supply of US dollars far greater than the size of the Quantitative Easing (“QE”) programme after the GFC in 2009. After 2009 the USD depreciated from $1.2000 to $1.4000 against the Euro over the subsequent years until it recovered in 2015 in expectation of US interest rate increases. There is no reason to suggest that the massive increase in supply of USD’s now occurring will not cause a similar depression in the US dollar’s value over coming years. History repeating in this fashion creates the largest risk for local exporters selling in US dollars, the falling value of the US dollar itself lifting the NZD/USD exchange rate completely independently of what is happening in the NZ economy.
The NZD/USD rate traded to a high of 0.6167 on Friday 1 May, however US President Trump raising the spectre of trade/tariff retaliation against China yet again has recoiled the Kiwi to 0.6060. Further US dollar weakness against the Euro to $1.1200 and higher over coming days should see the NZD/USD rate breaking above its 90-day moving average just below 0.6200. As weightings to the USD are reduced around the world, the currencies of non-oil producing countries and economies that are recovering from the pandemic ahead of Europe and the US will be favoured. The Australian and New Zealand economies and currencies fit this categorisation very well.
The short-term economic decisions required of the NZ Government
Finance Minister, Grant Roberston recognised last week that the 80% Government guaranteed loan scheme through the banks was not working as intended to get cash into struggling SME businesses. The replacement direct lending scheme by the Government through the IRD to businesses should work a lot better. A preparedness to adjust and move quickly in this fashion is exactly what the Government needs to do in the short-term.
The public mood and sentiment, which to date has been conforming and compliant to the Government’s measures to get on top of the pandemic, may very quickly shift to intolerance and impatience if the Government dilly-dallies on moving from Level 3 to Level 2. That decision should be taken and acted upon early next week to provide more certainty and confidence to all businesses that there is light at the end of the tunnel.
The inevitable moral dilemma question between health safety traded-off against financial/economic survival is now right in front of the Labour Coalition Government. A delayed shift to Level 2 decision stands to cause unnecessary economic damage.
The May 14 budget will provide further initiatives from the Government to help the economy out of the hole caused by the shutdown.
Positive engagement with our Aussie cousins (as the Rugby League boys have done) to create one trans-Tasman tourism market bubble should also be very high on the Government’s agenda this week.
The medium-term economic decisions required of the NZ Government
The shutting of borders and restricted global travel has fundmentally changed the international business and economic landscape. Many businesses succesfully being run remotely over the last two months has demonstrated to the world that geography and location are irrelevant. Hence the immediate business/economic opportunity for New Zealand to promote and sell itself as a safe, secure and vibrant place to run global or regional operations.
In addition to Government funding of Tourism New Zealand to market us as a tourist destination (now totally focussed on Australia), the Government needs to establish a “Investment New Zealand” entity to sell what we have to offer the world.
What we should be offering in this space is attractive incentives for offshore companies to locate and do their business here. Incentives would include free economic/trade zones within New Zeland with tax breaks, fast-track approvals, special employment visas and a one-stop Government agency to deal with i.e. Investment New Zealand. Examples are the technology hub in Israel and pharmaceutical industry in Ireland.
A technology zone in Queenstown has been suggested, movie industry zones in Auckland and Wellington also make sense.
Many commentators and politicans have talked about diversifying our economic base for decades, we now have a “first mover advantage” opportunity to do things differently in the digital communication age. Vision and bravado from the Government working in tandem with business leaders is required. Sadly, apart from David Parker (business experience/owner) and Damian O’Connor (farming business) the Labour Government is comprised of trade unionist and school teachers who do not understand global business and will be idealogically opposed to foreign businesses relocating here receiving special treatment.
All New Zealanders have experienced working, educating and entertaining remotely over the last six weeks, therefore public support for new industries based on the concept should be much more forthcoming.
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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.
50 Comments
Irrespective of any delay from level 3 to level 2 most of the economic damage has been done and will take years and higher taxes to fix. I'm hoping a 2nd wave does not occur otherwise the outcome will need to be herd immunity with the commensurate increase in deaths. Reverting to level 4 would be an economic catastrophe. NZ inc. will shutdown economically and any 2nd wave of economic support will cripple the country for at least a decade.
Agree. We just can’t go back to level 4. Shouldn’t even be contemplated.
It’s scary, I know of several very good and successful firms who are really in the dog poo right now. A lot of people on this website seem quite sheltered and unaware of the economic carnage that is unfolding, or don’t care.
Also agree, don't think they aware the flow on effects will start to hit every sector/industry in the country, it's just that some are taking the initial front line blows. News stories are starting to came in thick and fast of closures and redundancies...some very very good people find themselves in a position they probably never thought would happen. They more we can do to limit this the better. Issue is there does not seem to be any great plans to create jobs in this void, it's all very well to dish out welfare and loans, but these people want to work.
FYI, Hong Kong has had zero new cases of local infections for the last 14 days.
All the new cases of infections have been residents returning from abroad.
https://www.scmp.com/news/hong-kong/health-environment/article/3082640/…
I am noticing recently that the quality of writing on this site from its contributors is really hitting new lows.
Re: the Labour party being unsupportive of foreign corporations, as I recall one of the first acts the coalition made upon entering government was joining a very comprehensive pro neo liberal trade agreement. Doesn't quite fit with your biased narrative Mr Kerr. Besides which one could easily argue it isn't the governments job to pick winners and losers. I'd even suggest that NZInc can generate plenty of shareholder wealth 'losers' all by itself ;-)
But they modified it "significantly" to appease those who protested against it - including members of the current government - by inserting a very important part - The letter P. Calling it "Progressive" made everything alright......"Jacinda Ardern hails breakthrough in revised TPP"
https://www.nzherald.co.nz/business/news/article.cfm?c_id=3&objectid=11…
You are correct regarding manufacturing/trade wise. However the examples Roger gave were around Tech, R&D (e.g. pharmaceuticals), movie industry etc.. could all be successfully done in NZ given the right environment and incentives.
Every other country will now be competing for the same.. what does NZ offer them? We have poor infrastructure, limited skilled workers and are further away from economic hub of the world compared to others. We cannot rely on being in a position of having suppressed Covid as by the time the Govt gets anything going I'd imagine there would either be a vaccine commercialised or a lot of countries having herd-immunity!
NZ can never become a global manufacturing hub due to all those limitations you rightly pointed out. That being said, we can surely strive to move up the value chain on our own consumption. A lot of our bulk food items (snacks, lollies, etc.) are made in Aussie.
Some MPs (mostly Green) are demanding a sustainability fund of $1b for investments in circular economy projects. If spent in the right places, we could partly reduce our dependence on imported materials (plastics, fertilizers, fuel, etc.) while creating better jobs locally.
Face to face is still important in many sectors.
Agree though that location and distance is LESS relevant than it used to be. But no way is it irrelevant for almost ANY sector.
Conversely, location and distance may become more relevant again. When international flights were regular and affordable, it wasn't so much of an issue flying staff and executives down to NZ and vice versa. If flights become far less regular and more expensive, what happens then?
Also is there going to be the same sort of silly money flying around in the movie sector?
We turn away NZ business because of the heavy reliance on face to face. It just isn't cost effective for us. We are a data based digital SME. We produce reports every month with statistics on what we have achieved. We have thousands of reviews and yet Kiwis want endless sit down meetings, lunches and coffees, which just isn't an efficient use of our resources. We don't need to do that in ANY other country, not even Oz so we just don't take on Kiwi work. It's just unproductive.
In Queenstown?
I'd suggest further down would be better, in Southland or thereabouts. Leverage cheaper accommodation as well as electricity from Manapouri if we ever stop subidising Rio Tinto. Southland could be a great place to build data centres given the potential for colder temperatures and cheap, sustainable electricity.
Based on recent history, we can safely conclude that NZ doesn't do foreign investments particularly well.
Most of the John Key-era investments from wealthy foreigners have been in either in the non-productive housing sector or NZ companies selling part or full ownership to overseas interests.
The latter makes economic sense only when the new ownership structure brings in capital or expertise for expansion, diversification or innovation leading to high-value job growth. I can't think of but very few example where that has been the case here.
Ssshhh...don't say that! No one likes the statistics ruining a good mirage! Add to the long list of Key Error foreign investments the disastrous foray that was Chorus and the Ultra Fast Fibre roll out.... So badly underfunded that Chorus contracted it out to Vision Stream who then subcontracted the work to unskilled foreign 'Volunteers' or worse. If you're reading this page on your mobile phone because your farm can't access highspeed fibre and probably never will...or you've actually got a fibre connection but its routed through your oven into your pantry...you know who to blame!
And yet it has been one of the single most important factors allowing NZ to work from home in the past 2 months. But it had to start 10 years ago to be ready for now, I know that it has made my team able to work remotely without issue. I oversaw the installation to make sure it went where it should go, and was very happy with the final job.
Thank goodness for that foresight, no matter how much you want to criticise someone who has been out of government for several years to suit your agenda.
I really don't understand your comment Mark Hubbard but you really need to calm down, this comment is OTT.
IO hasn't made any character assassination. He has made some factual statements and links to articles. One that Kerr was interviewed for. What grounds would Kerr have to even want to sue? He would not have been interviewed regarding his business relationship with the Chow brothers, unless he was happy with the appointment?
Property investment, strip bars and prostitution are all legitimate business ventures in NZ. Chow brothers have certainly received a lot of mixed press, but equally they appear to court that sort of publicity, which might very well be a business strategy.
Most writers, journalists and media outlets have bias. I have bias and you clearly have biases too. That's life. I value the varied perspectives here. Sometimes they change my mind and enlighten me. If nothing else, some of the anti-boomer sentiment witnessed in these comments helped me realise the degree to which Gen Y and Z resent their economic circumstances. They also weren't the generation to start the blame game, I heard boomers attacking and shaming the millennial before I heard the slurs in the other direction. But that is beside the point, the fact that inter-generational anger exists is an important issue. We can't just attempt to silence it and hope it goes away, we need to hear both sides and do what we can to mitigate and improve.
IO didn't make any kind of character attack IMO. Is it character attack to say John Key sold his Parnell home to an overseas buyer for $23.5m? No. It's something that happened but does reveal something about his stance. The same with IO sharing links to Kerr's business associates. Which, I don't have a problem with at all so not sure what all the fuss is about. Why should there be stigma to sex work? It's a legal business.
Mark - this comment has nothing to do with generations, or you personally, even though you have decided above that it is/does. If this was gen x or millennial writing opinion pieces on business/finance and had involvement with brothel/property syndicates I'd post the links. I just found it very surprising to be honest. There's nothing illegal here, and Roger obviously agreed to the photo, so hardly character assassination. I didn't take the photo, I didn't write the article so not sure what I've done wrong!
Content benefits from perspectives to get the full picture - I'm simply providing one.
You told me to go to hell yesterday and now I need to bugger off today. Not sure if it is me dragging this into the gutter.
All the best Mark.
Your post here is some sort of attempted guilt by association of Roger Kerr that has nothing to do with his piece or the mission of Interest.co.nz. The other thread referred to yesterday you again didn't speak to content, just your anti-boomer boring nonsense to derail that thread.
You don't debate content.
Here's the thing for the EDITORS: I subscribe to NBR; the threads there are moderated, and are content only (and are an oasis compared to here). I will pledge to donate to Interest.co.nz my exact same NBR subscription, paid 6 monthly - so when I pay NBR I'll pay same amount into you same day - but only when these communists and gutter dwellers are moderated. Preferably named accounts only, but at least moderate them to discussion on actual content. Not this anti-capitalist, personality smearing BS they are constantly pulling across these threads.
People really are starting to show their true colours eh Mark! Don't hold back now.
I'm off to do some work in the vege garden then buy some short positions against the US stock exchange and reprimand myself about my terrible communist views (really?).
What a joke.
If people are not allowed to express views respectfully then this blog would simply be another echo chamber Mark Hubbard. Echo chambers are dangerous. Editors do an excellent job keeping the comments here respectful.
It is not anti-capitalist to discuss inter-generational wealth. If Tony Alexander is allowed to mock millennials struggles to buy a home, then why are millennials not entitled to defend themselves and speak to their struggles?
I certainly don't agree with all comments on this website, but I value the diversity of perspectives.
It's not a free speech issue. This is a private media org, they can choose the content of comments. They can have the gutter served up by you two and your ilk, every thread, or discussion of their articles.
My offer stands re paying a subscription to get rid of the gutter dwellers in here.
MH was getting antsy before Lockdown. We will see a lot of that - and a lot of the Kerr-style nonsense - for a wee while yet. They are looking backwards (and as one gets older, there is less time to redress what one sees as one's life achievement; people paint themselves into corners then start defending/attacking, more with age/lack of time).
What has happened here is that a growth-requiring system, operating within defined boundaries, came up against Limits. Not surprising, the last 'doubling time' is always problematic from half-way-to-a-limit onward. Those who bet on continuance - Kerr and MH being examples, obviously - are now somewhat bewildered. They shouldn't be. The system was on steroids for a decade, patently on life-support.
The real question is what sort of social construct we put in it's place. There is no point in kick-starting the motorbike (it had been on Reserve, in case you hadn't noticed). Waste of remaining time, waste of energy. But there IS a way forward - I just sense we're going to have to wait for total collapse for the Parkers of this world to single-up the cognitive part and drop the dissonant.
He didn't assassinate anyone's character. That's the point. But the messages have been deleted now and got nasty. I agree, character attacks are not cool, but actually MH made the attacks not IO. IO just raised an issue about the authors business associates and linked to that.
"You don't debate content."
I'm suing you for the strain I got from rolling my eyes at this.
Yeah I don't think Interest are going to start censoring the comments according to your whims for a $200 bribe bro. Or are you on the mobile-only NBR subscription? In which case your offer is a whopping $90. Talk about delusions of grandeur.
But, EDITORS, if you do decide to go for a pay-to-play comments section, I'll 5x Mark's offer. Yay, price discovery. :)
There's a massive amount of good debate in Interest comments. I also have commented plenty on NBR, but it's a little dull due to its becoming a bit more of an echo chamber in more recent years.
There is a certain irony now after years of folk lambasting universities, feminists, leftists, and other -ists for "safe spaces" that we now see calls for Interest to be a "safe space" for right-leaning folk. I myself am not a fan of "safe spaces" and "cancel culture".
The problem with named accounts on NBR has also been too much a tendency of certain types to resort straight to either basing their argument on their own person and "success" rather than the strength of their actual argument, or attempting to undermine the source rather than tackling the argument. It does not seem to fix the problem you're raising.
NB. by personality smearing, I'd assume you'd include your use of "communists and gutter dwellers".
To be fair to MH he's been consistently against what we've been going through now for over a decade. I'm of a similar ilk. If the problem is too much debt, more debt will not solve it. The virus is just the trigger. The real problem is that we, for some unknown reason, cannot allow things to fail when we should. That's how capitalism works. Things go good & then things go bad. Let the cycle alone to sort out its own mess. We don't need government handouts. Governments are the problem not the solution. What we really need now is for the incumbent socialists to grow some balls. That'd help. This is an economic crisis not a health crisis. Nor was it ever a health crisis in New Zealand. Whatever it is, it's a f@cking shambles.
LJM - only if you have rose-tainted specs on.
:)
This train was a wreck-in-progress globally, long before any trigger event. I can trace the fall-off back to 1970, the Neolib stuff as a result of that reduction of opportunity (so they had to grab them at the increasing expense of others) the peak of globalism at 1995, and a falling off ever since, accompanied by ever-bigger bubbles, ever more debt, and ever less planet. No prizes for working out where that lot went.
What I find interesting, is that you can put this stuff under people's noses, and they steadfastly carry on believing.
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