Roger J Kerr says the RBNZ appear to be assuming that exporters are not hedged and thus a higher currency vale will hinder our economic recovery

Summary of key points: -

• Elevated global risks not impacting on the Kiwi dollar
• The RBNZ is missing a key piece of the economic jigsaw

Elevated global risks not impacting on the Kiwi dollar

Increasing financial/investment market volatility levels are currently reflecting increasing global event risks as three developments are all impacting on investor sentiment and ultimate economic stability and performance: -

• US equity markets have just posted their worst week since March as the inevitable profit-taking in the high-flying technology stocks sends the market south ahead of Wednesday’s US Presidential election result. The investor “risk-off” mode is typically positive for the US dollar value and negative for the Kiwi dollar.
• The Covid pandemic cases and deaths rages to new highs in the US and Europe in second and third waves (despite The Donald consistently claiming for months now that they have “rounded the corner”). As US states and European countries return to differing levels of shutdown to stem the tide, the economic consequences are turned negative once again just as GDP growth recoveries in both the US and Europe were providing some hope.
• Investors and the markets will be hoping for a clear Presidential and Senate election outcome this week; however, the odds seem leaning towards a disputed result. The Republican versus Democrat polling will be so close in some counties in the key battle-ground states that the scenario of the Supreme Court ruling on voter fraud or missing ballot boxes is all too likely. The American voting system is so convoluted and their controls to ensure that democracy is carried out is so poor, that the prospect of a total “cluster” following the vote with civil unrest is all too real. Equity markets could be in turmoil and it is difficult to see why the US dollar currency value would be appreciating for a nation at war with itself.

A clear-cut Biden victory would allow the equity markets to stabilise even though US businesses will not enjoy tax changes and energy market regulation. A surprise Trump victory would not necessarily be positive for the US economy either as the control of Covid would remain cavalier and disjointed. Another four years of Trump would also further isolate the US from the rest of the world and not allow a synchronised global economic recovery to the pandemic shock.

Through all this increased uncertainty and risks in the world, the Kiwi dollar remains stable and calm in the 0.6600/0.6700 area. The appreciation to 0.6700 was not able to be sustained last week as the equity markets sold-off and the USD strengthened from $1.1800 to $1.1650 against the Euro. However, it is instructive how the NZ dollar and Australian dollar have been able to distance themselves over recent weeks to the falling equity markets and the Covid pandemic raging up again in Europe and the US.

A month ago, the expectation was that the NZD/USD rate could easily correct down to the 0.6500/0.6400 level if the EUR/USD rate was back in the $1.1600’s. The fact that the Kiwi has held to higher trading ranges is evidencing the stronger linkage of our economy to the Chinese and Asian economies, and much less so to Europe and the US. The Chinese Yuan exchange rate has stabilised at $6.7000 to the USD and this has allowed the NZD/USD rate to de-link a smidgeon from the EUR/USD movements.

Our commentaries have repeated the view for some time know that New Zealand’s economic fortunes (thus the Kiwi dollar value) are firmly hitched to the Chinese wagon, and UK/European changes/events are not that relevant. The recovery period from Covid is re-confirming that reality once again.

The RBNZ is missing a key piece of the economic jigsaw

As the RBNZ bring together their updated forecasts for the NZ economy ahead of next week’s Monetary Policy Statement (11th November) they will be missing a very important piece of data in respect to future inflation and GDP growth performance.

There is no central collection in New Zealand on the level and term of currency hedging by our importers and exporters.

However, if USD exporters are already heavily hedged three-years forward (i.e. NZD/USD conversion rates already fixed via forward contracts and option contracts) then an appreciation in the NZ dollar to 0.7500 next year is not going to have the negative impact on exporter’s sales, profits, investment and jobs.

The RBNZ have been continuously suppressing the NZ dollar value for a long time now, stating that a higher NZD/USD rate to above 0.7000 would hurt our export-led economic recovery. But would it? It appears that most local USD exporters (except the meat exporters who only hedge short-term and pass FX rate movements through to their farmer suppliers) are currently very well hedged against the prospect of a substantially weaker USD globally in 2021 and 2022 (nothing to do with New Zealand).

On the other hand, importer hedging will be reducing in amount and duration now that our election is behind us.

The problem is that the RBNZ appear to be assuming that exporters are not hedged and thus a higher currency vale will hinder our economic recovery.

A previous RBNZ Governor, Alan Bollard understood the importance of importer and exporter hedging to the economic outlook and would regularly call in to visit FX advisors such as myself to ask the question about what our clients were doing.

Apparently, the current RBNZ method to extract this important information is to canvas the annual reports of the NZX50 listed companies (the notes to the financial statements usually disclose currency hedges held). That information would be a long way from being representative of the total export industry hedging picture (listed exporters are not large in number – Scales Corp, F&P Healthcare, Synlait, Vista, Gentrack, Skellerup, Sanford, Pushpay and A2 Milk).

The plunge in the NZD/USD exchange rate in March to below 0.6000 provided the opportunity for our exporters to hedge forward for multiple years at very profitable exchange rates. Many exporting companies did exactly that, others were more tentative in acting as it was a very uncertain world in March and therefore export sales forecasts were even more uncertain.

The RBNZ statement next week will again highlight the elevated global economic risks as a negative for our own outlook, however the actual impact on New Zealand and our exports is not as negative (due to China) as the picture they will paint. Jawboning the currency down again will be a waste of time as they do not factor-in the exporter’s hedged situation.

Three months ago, all the local economists were confidently forecasting another significant leg down in the NZ economy as the Government wage subsidies were phased out. That has not happened and employment data for the September quarter being released this Wednesday will record a very modest increase to 5.4% in the unemployment rate.

Local USD exporters who are not well hedged against the forecast USD weakness over the next two years may have another brief window of opportunity next week to enter hedges in the 0.6500’s as the RBNZ continue with their dismal economic outlook (one which they will be forced to back-track on in the New Year). However, do not count on 0.6500 being reached if the US election result is the shemozzle everyone is expecting.  

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