Roger J Kerr sees Government guaranteed loan schemes as useful kickstarters and wants this followed up with an active effort to recruit international business operations

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.

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