Roger J Kerr says there is no plan for the future in NZ and there appears to be little recognition by the Ardern Government that you must get the best entrepreneurial and risk-taking business folk in the room to transform good ideas into bold action

Roger J Kerr says there is no plan for the future in NZ and there appears to be little recognition by the Ardern Government that you must get the best entrepreneurial and risk-taking business folk in the room to transform good ideas into bold action

Summary of key points:

  • NZD/AUD cross-rate gyrations put in perspective
  • The three medium-term drivers of the NZD/AUD rate
  • Australia take the initiative on economic recovery - NZ devoid of a plan

NZD/AUD cross-rate gyrations put in perspective

Whilst the NZD/USD exchange rate settles into an increasingly narrowing trading range between 0.5900 and 0.6200, attention is turned to the other major currency risk New Zealand importers and exporters face.

The movements of the NZD/AUD cross-rate reflect and are a manifestation of the performance of one currency against the US dollar relative to the other. AUD outperformance over the NZD against the USD results in a lower NZD/AUD cross-rate and vice-versa.

The extraordinary wild swings of both currencies against the USD in late March when the world economy went into a Covid-19 lockdown, resulted in the NZD/AUD cross rate spiralling from 0.9300 to 0.9900 in a matter of days as the AUD tumbled at a much faster rate than the NZD.

The subsequent rapid recovery of the AUD, when the US Federal Reserve provided USD swap facilities to other central banks, reversed the direction of the NZD/AUD rate as the AUD powered all the way back up again. The cross-rate reversing engines dramatically from 0.9900 on 18 March to a low of 0.9230 last week. Since February, the AUD depreciated 11 cents from 0.6800 to a low of 0.5700 against the USD at the height of the currency panic on 20 March and has now recovered 8.5 cents (77%) back to 0.6550.

In contrast, the Kiwi dollar plummeted nine cents from 0.6400 to 0.5500 and has now recovered six cents to 0.6100 (66%).

The NZD/AUD cross-rate has tested both ends of its established trading range over the last two months, providing both danger as well as hedging opportunities to local AUD importers and exporters.

The signal for AUD importers to hedge future AUD payments at 0.9800 and 0.9900 in late March came from a predictable source. The inevitable pronouncement from local economists and financial market commentators that it was time to put the champagne on ice in preparation for the NZD/AUD “parity party”, was the prompter for the rate to go the other way!

The three medium-term drivers of the NZD/AUD rate

Whilst short-term market speculation and thus trading volatility have driven the massive swings in the NZD/AUD cross-rate in recent weeks, over the medium term the cross-rate will continue to be driven by the three prime determinants of relative value: -

  • Commodity price differentials – Both currencies are accurately categorised as “commodity” currencies, with strong historical correlations to mining/metal commodity prices in Australia and dairy commodity prices in New Zealand. Chart 1 below indicates that the commodity price differential would have the NZD/USD cross-rate somewhat higher at 0.9800.
  • Interest rate differentials – Whether the RBNZ was in or out of synch with the RBA on the timing of monetary policy changes, determined the interest rate gap between the two currencies. For many years, the interest rate differential was a very reliable forward indicator of the direction and value of the NZD/AUD cross-rate. As Chart 2 shows, over recent years with both interest rates reducing to historically very low levels, the correlation has broken down somewhat. The current interest rate differential points to a 0.9000 NZD/AUD cross-rate.
  • Relative GDP growth performance - Over the last five years the New Zealand economy has generally out-performed the Australian economy on the growth leagues table. That outperformance justified and confirmed the shift in the NZD/AUD trading range from 0.8500/0.9000 previously to 0.9000 to 0.9600 (broadly) in recent years. Forecasts of economic growth for Australia and New Zealand over the next 12 months are nigh impossible currently, the only guide would be that Australia did not enforce the extreme Covid-19 lockdown under Level 4 that the NZ economy was hit with, therefore Australia is better positioned for an earlier and stronger economic recovery. Consumer and business confidence are recovering faster in Australia compared to New Zealand. Our stronger GDP growth performance has come to an end, suggesting a lower NZD/AUD cross-rate.

Australia take the initiative on economic recovery - NZ devoid of a plan

Looking forward, how the New Zealand economy (thus currency) performs vis-à-vis Australia will be determined by not only the three prime determinants described above, however also the economic policy decisions the respective Governments make to drive the recovery.

The Australians appear to be well ahead of us in initiative, purpose and organisation.

As the Chairman of the NZ Government’s Business Advisory Council, Fraser Whineray aptly stated last week, the Australians are “co-optimising” resources between government and business to push recovery and reform much better than New Zealand.

The Aussie government has business leaders actively participating in a Business Recovery Taskforce and a Reform Commission. The Australians have correctly recognised that the new world economic order is going to be a lot different and therefore Australia needs to change and cannot hope the “same old/same old” will produce economic growth and preserve jobs.

The Labour Coalition Government here shows no signs of engaging private sector business leaders in shaping our recovery plan and future economic policy settings. It is relatively easy to throw Government money (all borrowed) at the economy in a crisis and Finance Minister Grant Robertson has done that well over the last two months.

However, a different set of skills and attributes are required to grow the top-line in a disrupted world.

The disillusionment and frustration expressed by the Government’s business liaison man, Rob Fyfe, with progressing any form of cut-through in the Wellington bureaucracy is a sad testimony on New Zealand’s situation.

There is no plan for the future and there appears to be little recognition by the Ardern Government that you must get the best entrepreneurial and risk-taking business folk in the room to transform good ideas into bold action. The massive Government debt burden ahead of us can only be repaid and reduced by strong economic growth and higher tax revenue into the Government.

New Zealand needs to do things differently, or the previous “brain-drain” of young talent to Australia will recommence.

Australia will need to tread very carefully from here with its deteriorating relationship with China, however it stands to gain the most when China adds further fiscal and monetary stimulus to its economy.

In removing its GDP growth target for the next year, the Chinese authorities have admitted that their consumers are reluctant to spend, and unemployment is increasing in their economy. A major Government infrastructure build package cannot be far away in China, which should see a recovery in metal and mining commodity prices and further gains for the Aussie dollar.  


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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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35 Comments

I don't think we should be bench marking too much with Aussie. We have done a better job than them in managing Covid.

Yes agree some business leaders should be involved in the recovery with govt. These should be NZ businesses and leaders, not Aussies, Poms, etc. We have real risk of Aussie businesses coming here (if not already here) and take over our infrastructure and other projects etc. I do not have trust in their business ethics and profits going overseas doesnt grow our economy. Also stop importing senior positions in businesses from UK, Aust, etc. Let's start supporting NZ businesses and NZ based business leaders. This is a good time to start doing this

Many senior positions in other countries are held by Kiwis. We must ask why they do not want to live here. General well being is good in NZ - health, environment, education - not necessarily better than other countries but on a par - so it is salary and housing costs that are holding us back. That and possibly NZ not being exciting enough - our biggest city Auckland cannot compare with London, NY, Paris - in fact it would fit into a suburb of most of the worlds big cities. Who wants to be a big fish in a small pond?

How exactly has Australia done worse than us on Covid? Their per capita death rate is less than ours and they didn't lock down like we did. If you mean by creating greater economic destruction and unemployment in the pipeline, then yes, we have done "better".

@chessmaker .......done a better job with Covid ?

Have we ?

I am not so sure .

The numbers suggest little difference in actual deaths as a % of our respective popns.

More importantly their economy is largely intact , unlike ours which is in tatters .

"I don't think we should be bench marking too much with Aussie. We have done a better job than them in managing Covid."

I enjoyed the irony of the first sentence stating not to make comparisons immediately followed by a statement of comparison (we've done better).

It might be more accurate to suggest you only want to hear about comparisons that fall in our favour.

AU cases per million: 279 (including cruise ship numbers)
NZ cases per million: 312
Deaths both 4/million, testing per capita within 10%.
AU could have another 850 cases and still have the same per capita result as NZ.
So compare their economic decline against that of NZ, and see how the economies compare before we make rash statements on who managed things the best

So the Aussies have put together a taskforce/working group/talking shop? Those lucky bastards. No doubt they’ll report back that what’s needed is more innovation, productivity gains and strategic alignment. That will help a lot. A shame we can’t do similar. Probably need to get some Aussie bankers in to show us how, or maybe a McKinsey consultant.

Advice from Australians? No thanks, didn't they have half their Country go up in flames recently? Not the sort of people I'd be listening to....

So, if you were an Australian and NZ was decimated by a large eruption then I guess that you wouldn't value the opinion of any New Zealanders either? That's deep.

@4th estate , dont be ridiculous , Aussie bush fires are nothing new , its a phenomenon that is likely as old the continent itself .

They need to get back to clearing the vegetation around buildings susceptable to fires , like they used to do , to minimise the dangers

Ah, a typical half-witted 4th estate comment! Are you a paid up Greenpiece activist by any chance?

Shut up DD62, you'll sound sound more intelligent if you do. The Australians failed to organise and fund their resources correctly which led to the bushfires doing far far more damage. Had their leaders actually done their job instead of going on holiday the fires would have been far less destructive.

1. Fire fighting agencies in Australia are state owned.

2. It was State government that cut some funding, not Federal government. And not to the Rural Fire Service, as was claimed.

3. It had nothing to do with holidays, it was made worse by climate change:

"Professor of Bushfire Behaviour and Management Trent Penman added "If there was a silver bullet on bushfires we'd have found it by now, after the 51 [bushfire] inquiries since 1939,"

The facts are here: https://en.wikipedia.org/wiki/2019–20_Australian_bushfire_season

My dead silent comments would still sound way more intelligent than the drivel you come out with! You come across as knowing a hell of a lot about nothing! Comment to 4th estate, not Ralph, sorry!

Oh of course they would and I'd bet good money you write your own reviews! Now, because I'm a caring type...if you don't mind me saying so, you sound a little pent up, lack of sex life post lock down perhaps? If I may....in your best interests only....suggest a couple of hours Morris Dancing to help level out your negative energy? I think you'll be far happier afterwards :-)

My point wasn’t a dig at Australians; it was at the author’s assumption that setting up a working group means much of anything. If ‘getting the right people in the room’ was the magic sauce for economic recovery, running a country would be easy. But it isn’t. Very flimsy grounds on which to say Aus is doing better than us. Far too soon to judge that either way, and chances are we’ll both be buffeted In the same directions by the same global winds, regardless of who is in power here or there. But it will make some people feel better to blame it on Jacinda, or ScoMo, or whoever...

Best and brightest? If Rob Fyfe is the best NZInc can offer then we should be worried, very worried. I think the critcisms of Labour coalition are unwarranted. Here are the facts. In absence of any leadership whatsoever from the NZ business community the Govt has fulfilled its duty to the citizens of the Country and acted purposefully and successfully. All the while NZInc has resorted to its tried and true approach to adversity by fleeing into its mousehole not to be seen till favourable conditions return. Thats not exactly the sort of business community you want deciding the fate of the Country's economy is it?

If we want to hang on to our young folk, then providing a market that supplies good affordable (at least 30 % lower than now) homes would be a good start.

How exactly would we be able to supply $400,000 nice 3 bed house and land packages for our young families , that we see 20mins north of Brisbane ?

Get rid of the hurdles , thats the only way

Yep. I think there are far too many of those. It was interesting to note:
1 How frustrated Rob Fyfe is with the Wellington bureaucrats in his new role help the government deal with the pandemic challenges. He has an excellent record of success with staff and public buy in, so what does that say about the government so called "servants".
2 The chap appointed by the government to deliver Kiwibuild ruffled the feathers of the inert government staff, was stitched up and got rid of by same, who then completely failed to deliver any meaningful results.

Further I would add that the Australian equivalent of our Commerce Commerce Commination is far more active and ruthless in addressing monopolistic and restreictive trade practices such as those we see in NZ.

Agreed! Lets face it, our Commerce Commission and Serious Fraud Office are both lame duck wastes of space! Along with our media!

Agree to some extent, although their building costs are much lower and that's mainly down to the size of their population and economy - economies of scale.

And their building code. You can pile bricks in lines and stick a roof on it in Aussie (almost).

Look at the disaster that was the Newcastle earthquake on the type of cheap construction they use. Quite a mild earthquake caused a lot of damage.

1. Get rid of the hurdles
2. Get rid of central redistribution in aid of pushing up prices (i.e. adjust central banking, stop subsidies to investment properties and wage bills)

I don't often agree with Roger, but like him, I am deeply worried about the government's ability to partner with business in a transformation of our economic model. We have a chance to markedly improve our productivity per head-it's been poor for decades- but I fear that few of our politicians have any real vision of the possibilities with NZ First the worst of the bunch.
There is a really good piece in Newsroom by Rod Oram today on this. It's well worth a read.

I quote Jacinda Ardern in August 2018, telling business people where they really stand in her view. When asked about business confidence slumping to the the bottom of the OECD average she said, “What I'm interested in is employee confidence, I'm interested in consumer confidence .. “

Working New Zealanders doing business are not on her radar.

The subsequent rapid recovery of the AUD, when the US Federal Reserve provided USD swap facilities to other central banks, reversed the direction of the NZD/AUD rate as the AUD powered all the way back up again.

From TIC: US banks built this $ buffer, in large part, by pushing their for. subs to bid for US$ auctioned by overseas central banks sourced by the Fed's overseas dollar swaps.

How bad is the Fed at $s if this is how banks build $ buffers? Link

Having read this I summarise as follows, which may reveal to you something I have don't understand;

1. The market thought the Fed incompetent, so switched to a 'high risk' view (regardless of Fed-talk).

2. The high risk view demanded a high liquidity reaction.

3. The US domestic release of liquidity (in whatever form) was not sufficient.

4. The Fed released to foreign reserve banks via the overseas dollar swaps.

5. Therefore the US domestic banks used that mechanism to achieve their liquidity requirement (via their foreign subsidiaries).

Rather than the cause of the swings being any notion of 'USD safe haven'.

Is that right?

Roger is right on this score .............. we dont have a plan .

Just like Kiwibuild .............we never saw a detailed documented plan for its implementation , just wild thumbsuck ideas and wishful thinking and money being thrown around

Aussies at least have a plan , we have just had a kneejerk budget that has opened the money floodgates and done little else

Even though its been hailed a "success , our Govt reaction to Covid too , was kneejerk ,and its likely to have long term damage to our prospects .

It has been like building a house without asking what it costs.

I give the Govt a 'B' grade on their covid response. Generally, Jacinda has been superb.
But....they came out of lockdown far too slowly, and that will come at a cost. Some of the messaging has been ambiguous too.

Unfortunately, I'm very pessimistic on their ability to lead an economic recovery.

Balanced article from Roger. Credit where it's due.

For once, Roger, I can congratulate you on one of your articles.
You are right on the money here in your criticism of the government.

As someone who has shifted most of my cash reserves to AUD and investments I see NZD going down a lot more easily back to 1.12 in near term.
All we have going at moment is milk powder and over priced buildings.
As per above in Brisbane a larger city than Auckland housing costs are much better due to higher wages and lower build costs.
Until we sort out the building and housing costs we will trapped into debt for housing rather than investing in other areas to boost jobs/income levels.

Agreed that its a good idea to get "..... the best entrepreneurial and risk-taking business folk in the room" to help draft a plan. However, we need to be careful that we don't get supporters of the status quo dominating - as is suggested to be happening in Australia by the extractives industry push re the gas industry expansion proposal:

https://www.theguardian.com/environment/2020/may/21/leaked-covid-19-comm...

And, didn't National have very good links with business yet existing problems like our productivity challenges were not addressed? So what are the blockages to addressing challenges such as low productivity? (As these blockages to addressing older problems will probably impact on how we plan for post covid recovery and re-orientation).