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Roger J Kerr worried that weak border controls undermine foreign investment attractiveness advantages COVID-free might have given us. He also sees opportunity in upcoming RBNZ predictable messaging

Roger J Kerr worried that weak border controls undermine foreign investment attractiveness advantages COVID-free might have given us. He also sees opportunity in upcoming RBNZ predictable messaging

Summary of key points:

  • Covid19 “own goal” an economic setback
  • Adrian Orr will be true to form on jawboning the Kiwi lower
  • US dollar’s reserve currency status under question

Covid-19 “own goal” an economic setback

The NZD/USD exchange rate has recoiled from the highs of 0.6575 reached on 9 June to trade lower to 0.6410. Given the negative virus quarantine control and GDP economic news coming out of New Zealand over the last week it is a little surprising it is has not weakened further.

The NZ Government’s smug complacency over their success in controlling Covid-19 has turned to bite them on the bum as the Health Ministry displays complete ineptitude in operating strict quarantine controls for travellers arriving into the country. The nation was asked by the Government to sacrifice a lot back in March and April in order that Covid-29 could be eradicated quickly, and the economy could rebound earlier. Both business folk and consumers alike now rightly feel betrayed that the health authorities could not do their job to the required standard and untested/infected individuals could wander around the country.

It is not good enough that Government politicians lay the blame at the people and systems in the quarantine hotels. However, responsibility and accountability for failures and stuff ups has not been a hallmark of the Ardern Coalition government. Unfortunately, the inadequacies of bureaucratic government departments are now directly impacting on the fledgling economic recovery as households will be more cautious about spending and travel. The prospect of the NZ economy recovering ahead of others because we took the tough medicine with the total lockdown and therefore could return to normal activity earlier has been dealt a body blow. A frustrating “own goal” for our economy and one that may well prove to have adverse consequences for the Labour Coalition government come the general election in September. The “be kind” and “we have got this” feel-good image surrounding the Prime Minister, I suspect, is rapidly being replaced by a view that they are not up to the job.

The opportunity to promote New Zealand’s unique status as “Covid-free” and open for international businesses to come here has also been delivered a major setback. Any positives the NZ dollar currency value may have received from foreign capital inflows because of our Covid-free status have also been eradicated by the bureaucratic bungles.

There was no great reaction in the forex markets to the March quarter’s GDP growth result of a 1.6% contraction being considerably more than the prior forecasts. However, it needs to be said that any forecast of economic data is fraught with extreme difficulty in the current environment. Whilst the decrease in economic activity was more than experienced in Australia over the first three months of the year, the outcome was not too different to GDP results in Europe, Canada and the US.

Adrian Orr will be true to form on jawboning the Kiwi lower

In the short-term, the Kiwi dollar is certainly at risk to further depreciation against the USD into the 0.6300’s and maybe to the mid-0.6200’s.

Being true to past form, RBNZ Governor Adrian Orr is likely to comment on the recent NZD gains to 0.6500 when the RBNZ reviews the OCR on Wednesday 24th June. His rationale and justification to be always talking the NZ dollar lower is perplexing to the writer, however he would be inconsistent with all previous monetary policy signalling/messaging over the last two years if he did not mention the value of the currency.

On all prior occasions the Mr Orr has jawboned the Kiwi lower, the selling pressures in the FX market never last too long and the Kiwi soon recovers to the pre-statement levels. The OCR review this week should be no exception to that pattern.

Therefore, exporting companies should take advantage of the short-term dip to add to forward hedging percentages. Orders placed with banks to buy Kiwi, sell foreign currency forward should be staggered down, not just for the NZD/USD but also for the cross-rates against the AUD, GBP and EUR. The RBNZ triggered selling will be specific to the NZ dollar, therefore all cross-rates will briefly drop in unison.

Importers should already be well hedged to protect their trading margins over this expected short-term period of weakness in the Kiwi dollar.

US dollar’s reserve currency status under question

The anticipated short-term pull back in the Kiwi to marginally lower levels does not, however change or disrupt the medium to longer term view that the US dollar itself is at the start of a new and potentially multi-year downtrend against all currencies. It is clear that the major EUR/USD exchange rate is not about to move in an even/straight line higher (stronger Euro, weaker USD). After climbing to $1.1375 on 10 June, the USD has recovered back to just below $1.1200. The risks around a major potential second-wave of coronavirus infections in the US has reduced somewhat, well that is what Wall Street is telling us anyway! President Trump seems impervious to the health and economic risks of a second wave in the US and relies on a “hope” the pandemic will simply go away. Trump also appears to be ignorant of the risks around the more officials he fires, the greater the likelihood they will seek vengeance and payback though disclosing how he really behaves (e.g. John Bolton).

The majority of US-based foreign exchange market analysts and commentators still argue the “TINA” defence (There Is No Alternative) to the value of the US dollar as the world’s reserve currency and therefore it will not weaken. However, as respected Yale economist Stephen Roach (ex-Morgan Stanley) argues, the US dollar is no different to any other foreign exchange rate. It is a “relative” price and as such it incapsulates a broad spectrum of a nation’s value proposition of economic, financial, social and political factors compared to other countries.

Recent events in the US with social unrest, the Covid-19 economic downturn, increased government deficits/debt and a divisive President facing re-election (or not), all add to undermining that USD relative-value proposition.

Roach’s viewpoint is that the level of everyone’s foreign reserves held in USD’s will continue to decline over coming years as the US leads the charge in trade protectionism, de-globalisation and decoupling. Global managed funds, central banks and financial institutions will all be looking to re-weight USD holdings/exposures to lower levels. The US needs to attract foreign capital to fund its dual budget and Current A/c deficits (domestic savings are not enough). Foreign investors will not commit their funds with the USD exchange rate currently so strong, the USD needs to depreciate to a lower value to then attract the capital inflows. 

If the US dollar value does re-align and weaken to $1.2000 against the Euro, the NZD/USD exchange rate would return to above 0.7000 (refer chart below).


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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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30 Comments

10
up

We were never going to be able to promote ourselves as "covid free", and anyone who believed that was naive. As long as we have people coming through the borders, there will be cases - just look at the infection rates in the countries these arrivals left. The whole weak border response beatup is misguided - show me the community transmission that has resulted from the supposed weaknesses. Any system rushed together will have flaws, especially when exemptions are pushed for - oddly enough by the same voices that are complaining about the flaws!

India and National come easily to mind!

Yes, the beatup on Jacinda / government is a bit misguided. Yes, their image is tarnished, but the most vocal critics would be those who weren't going to vote for Labour any way, finally seeing this as a 'chink' in her armour they need to exploit with maximum intensity - which ultimately puts people off when it turns out to be an overreaction.

The government's use of ministry of health staff to implement the isolation and quarantine system, when they themselves acknowledge that the ministry of health is mainly a policy ministry without much operational know-how, is fairly incompetent.

Talking to a lot of people in the weekend, its no so much as this wee hiccup, it's the reality that a lot of them are very very nervous about their jobs. A number of them know of newly unemployed and quietly in the background companies are restructuring getting rid of two-three-four staff here and there. So far they all agree that the government has not announced any real measures, apart from the short term WS, to stop this momentum building. I think came September it may be a lot closer election than we think now as there is a real fear running through the community that Labour does not have the ability to help the economy recover or stabilize to job losses.

Wasn't the neoliberal revolution supposed to remove the government from peoples' lives, giving them the freedom to make their own economic decisions? Why the rush to rely on the government now?

Because it is a two faced system where the risk takers (many who have been well rewarded) don't want to incur the costs of their risk.

the problem is that teh government is a team of very very few - when competency is measured -- and so whilst Jacinda might be a great communicator and empathetic to the nth degree -- actually doing anything is not her strength -- and she is surrounded by incompetent ministers -- clarke / twyford / davis etc

So she has resorted to the Army -- already involved to ensure a very simple thing actually happens -- the increase in cases is not a result of people coming from India -- its a result of us ACTUALLY testing returnees -- most of whom have gone through 14 days of mingling in and outside hotels without a single test -

The National party meme......

I think that's unfair. I've voted for Nats maybe 1-2 times in my life, Labour at least 3-4 times, and voted for Labour at the last election.
Yet, I (sadly) totally agree with this comment:

'the problem is that the government is a team of very very few - when competency is measured -- and so whilst Jacinda might be a great communicator and empathetic to the nth degree -- actually doing anything is not her strength -- and she is surrounded by incompetent ministers -- clarke / twyford / davis etc'

by a social worker with 30 years experience - still running healthcare services today hardly a dyed in the wool nationalist - but here are some facts from the frontline - i have 250 staff over 150 residential beds including a dementia hospital and hundreds of community clients

PPE was not available to the sector unless you already had it for the first 4-6 weeks -- it is now- if you have a suspected or confirmed case - but was not then despite the daily messaging
the PPE guidelines were changed -- very early in lockdown - because providers could not get the supplies the nation was told existed
Healthcare - and the MOH wanted the lockdown 10 days earlier - ( equates to over 1400 of the 1500 cases)
Guidelines to providers changed daily - with little rationale - one minute community supports was non essential - the next essential - really depended on how loud the clients families shouted!
ACC did not underwrite funding - leading to huge losses for some providers - but hard to claim subsidy if other parts of your business still operated ie residential supports - and not like this is a hugely profitable business in teh first place
DHB staff visited services in what looked like NBC - but full PPE gear -- at the same time as telling our staff they did not need to wear masks!
MOH / MSD / DHB's all demanded copies of pandemic plans that they already had -- but could not find -- then wanted us to update them twice in four weeks - as well as manage severely unwell people through quarantine

The health minister - AWOL for the crisis - and in general - would not survive 6 weeks in an NGO - he is incompetent and everyone knows it

valuable comment, life at the coal face a lot different to the back office. A politically neutral question, given your 30 years experience, have you ever encountered a competent health minister?

Travellers should be required to have a clear covid test within 2 days of boarding any flight to NZ. Putting extra strain on healthcare with sick people arriving here, also pay for your own quarantine. ( I see hotels are now beyond capacity in Auckland)

I don't know how anyone with a rational outlook would expect things to go perfectly smoothly, theres always going to be setbacks and the border issues are just an example of this. Adapt, improve and carry on.

I'm not sure if everybody who has been on house arrest will be feeling so charitable. My guess is that if we are asked to go back into lockdown again, the team of 5M will be smaller.

Why would we go back into lockdown? There is no community transmission, as far as we know. This whole affair is becoming scaremongering rubbish, driven by desperate politicians and click seeking media.

My view is that it will only be a matter of time before the likes of an Air NZ cabin crew member restarts community transmission. My understanding is that they don't self isolate, yet they are on the same flights as people coming into the country with COVID. Its a recipe for disaster. Once it is in, there is no difference between Mar before our lockdown started and now. Once the spread starts, we would need to go back into lockdown to stop the spread again.

This is why the ranting and raving that exceptions to isolation should be made on compassionate grounds was misguided and dangerous. Even with a very competent Ashley Blomfield in charge of the health response, I would find the idea that we'd have flawless systems and trained people at every step of the isolation and quarantine system absolutely fanciful.

Throw in a few more entitled Karens, a blustering MP Chris Bishop or others, and a few intimidated isolation workers who don't know better or who think it's probably okay, and I could imagine similar scenarios happening many times over.

Trained resources and flawless pandemic management systems don't happen quickly, so I'd hope people can deal with two weeks isolation without exception for the sake of 5 million other folk, and not act like entitled whingers.

Why could they not be doing 2 weeks of Quarantine BEFORE they get on a flight here ? This makes far more sense because once a couple of sick people get on a long haul flight, every single person on that flight is compromised. Sorry but just STOP people coming in without 14 days quarantine and a test. So now basically a few idiots coming home has jeopardized the entire country of 5 million people and threatened them with another lockdown.

Yep, seems ridiculous to be importing infected people.

Because we can't trust or verify the effectiveness of the quarantine (not that ours appears to be up to much chop at present, either). That also might work for some countries, like perhaps Australia and some european countries. But others we simply couldn't trust that they'd done it properly.

For what it's worth, the Avatar film crew were in isolation for 14 days in the US and all returned negative tests before they got on the flight to NZ. They took their responsibilities totally seriously, for the privilege of entering NZ for work.

Bugger - Did the couple of Covid cases muck up your forward dollar pricing for your clients?

I think Chris Trotter makes a good point in his article that our agencies are simply not used to being heavy-handed. Most NZers are very cooperative with authority, and in most cases it doesn’t matter too much if a few aren’t, you can shrug your shoulders and let them walk away. It’s a big mindset shift for public servants to DEMAND compliance rather than asking for it politely. It doesn’t come easily to most people.

Get the Mongrel Mob in?

> US dollar’s reserve currency status under question

I'm skeptical this will ever happen. Looking at the contenders, those jurisdictions don't protect private property rights, nor have an independent judiciary, nor have transparent govt elected by people.
U.S.A. by contrast is the place where the great unwashed have been queuing up to make it for hundreds of years now. Until the contenders change their ways, the U.S.A. will be the undisputed champion of attracting and protecting capital.

If Trump is so "ignorant" why were unemployment rates for blacks and women the lowest im 50 years+ And what is wrong with "hoping" C19 will go away. It already has, as all the science indicates

Everything, everywhere, ends.

Everyone excited about a USD failure seems to miss that the world has ended at that point. The USD is not "no different to any other foreign exchange rate." The world borrows in dollars. They must repay in dollars.

The USD will end at some point in time but it is incredibly unlikely that time is now. For our sake, we had better hope it is off in the future.

Agree Mike - there would need to be mass debt default/debt forgiveness for the currency to lose its place. And for that to happen, the world would be in complete chaos, which we were heading towards in March. I think it could happen, but not yet.

They're probably safe at the moment because Xi Xinping and the entire mainland China system is so untrustworthy...and the Euro looks non-viable for other reasons. But they make themselves more and more vulnerable by exporting their problems via exporting inflation.

'No different to any other foreign exchange rate'

I'm lost for words. Imagine if Roger knew what the Eurodollar was and how it's created and regulated.

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Days to the General Election: 38
See Party Policies here. Party Lists here.