Summary of key points: -
- One economic/FX risk reduced with a Labour majority government
- Time for business and rural leaders to stand up
- USD exporters should be adjusting hedging strategies
One economic/FX risk reduced with a Labour majority government
The stunning New Zealand election result which sees the Labour Party assume ultimate power has removed one risk that could have pushed the NZ dollar lower in the short-term.
The majority Labour win with the Greens not holding the balance of power means that there will be no horse-trading on far-left Greens’ economic policies to form a Labour/Greens coalition government.
The view of this column over recent weeks has been that an election outcome of Labour ruling by themselves would be neutral to positive for the Kiwi dollar.
The prospect of the Greens being the kingmaker has not come about, thus one negative for the NZD has been removed.
The fact that the financial/investment markets for NZ equities and the NZ currency were not sold-off ahead of the election indicated perhaps less worry from the markets about the Greens than what the business community were reflecting.
The massive swing to Labour in traditional National Party strongholds throughout the country has confirmed that the public wanted stability of government against the Covid health threat and that National was punished by their supporters for disunity, ill-discipline and all the leadership changes.
There were reports of business folk changing their traditional vote for National to Labour as they feared the Greens holding the balance of power thus wanted to ensure a majority Labour win. They have achieved that objective, now it is up to the new Labour Government to deliver on the huge mandate that have been given.
Time for business and rural leaders to stand up
Business confidence collapsed when the Labour coalition government accidently fell into power (due to Labour totally bending over to Winston’s demands) in 2017.
Business confidence has never really recovered and took another battering on the Covid enforced lockdowns.
The relationship between the business community and the Ardern/Robertson government over the last three years has been frosty and lacking mutual trust.
The NZ First handbrake on the more extreme left employment and tax policies is no longer there for the business sector.
Therefore, it is time for both sides to repair that relationship and form a partnership that benefits all New Zealanders.
For the sake of the NZ economy recovering from Covid and taking advantage of the current opportunities in front of us, it will be important for the business sector to accept the Government we have voted in and to get on with life with a positive outlook.
Instead of blaming the Government for increased costs, employment law changes and more regulations, business needs to adjust to the changing economic policy environment.
Whilst some increased costs imposed by the Government are a negative for business investment and expansion, there are compensating cost reductions with low interest rates and hopefully faster resource consents to do new stuff under a reformed Resource Management Act. The Government’s job is to create a more certain environment for business to operate and in turn business needs to stop looking to the Government for all the answers and total certainty.
Finance Minister Grant Robertson is not about to reverse the neo-liberal/free-market economic policies introduced by the reformist Lange/Douglas Labour government in the last 1980’s which have been so successful for New Zealand.
Looking ahead, the underlying economic fundamentals for New Zealand are not as negative as the picture painted by several economic forecasting houses.
For our export industries largely selling food to the world, the outlook is positive with a very high terms of trade position and a competitive exchange rate in the mid 0.6000’s.
The global economy may have a lower growth rate, however the global demand for our protein and niche manufacturing products is robust. It may take a while for international tourists to return, however the new Government needs to accept that they do not have all the answers to speed this up, and therefore they should partner with the private sector to apply smart science and technology to safely open up our borders.
It is time for business and agriculture leaders to take an olive branch to the new Government and constructively promote a dialogue and partnership that will lead to increased investment and jobs.
Federated Farmers also need to bury the hatchet with its strained relationship with the Government, compromise and move on. As previously stated, New Zealand should see climate change and global warming as an opportunity to grow more and a wider variety of food for export. Our land use will be changing, it just needs the water. The new Government should be encouraged to support regional irrigation initiatives such as the Te Tai Tokerau Water Trust in Northland.
USD exporters should be adjusting hedging strategies
Irrespective of the political changes in New Zealand, USD exporters continue to face the risk of a higher NZD/USD exchange rate in 2021 due to a weaker USD on international currency markets, a stronger AUD on higher hard commodity prices and global food shortages underpinning our agricultural commodity prices.
Exporters planning on using FX orders placed between 0.6550 and 0.6400 to top-up their hedging percentages for the next three years, now need to consider that the probability of that dip occurring has considerably reduced as the political risk (Greens holding the balance of power) has been eliminated. There should to be less reliance on the orders below 0.6600 being activated to achieve the hedging percentages required. The “Plan B” hedging strategy could be reducing the current FX orders by 50% and transacting immediately off a spot of 0.6600 or buying short-term NZD call options to have a bet both ways on near-term NZD/USD rate movements.
Another wave of Covid spread in Europe is likely to weigh on European equity market and thus the Euro currency value over coming weeks, therefore a lower EUR/USD exchange rate below $1.1700 may assist to shift the NZD/USD rate into the 0.6500’s and 0.6400’s. However, do not count on it!
Upcoming NZ economic data releases include: –
- Tuesday 20th: NZIER Quarterly Survey of Business Opinion – likely to be NZD negative.
- Wednesday 21st: GDT dairy auction – higher prices gain should be NZD positive.
- Friday 23rd: CPI inflation date for the September quarter – result likely to be above +0.60% consensus forecasts, thus NZD positive.
In summary, local USD exporters would be unwise to rely on Governor Orr at the RBNZ to continually suppress the NZ dollar and hold it in the mid-0.6000’s for their benefit. Only a substantially weaker NZ economy from here would justify additional monetary stimulus in the form of negative interest rates. The chance of that occurring is reducing in my view.
*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.