Summary of key points: -
- RBNZ action a short-term risk factor for the Kiwi dollar
- Local factors turbo-charge the Kiwi dollar higher
- End of year profit-taking in several markets also a risk...
- Any NZD pullback likely to be short-lived with positives in January
RBNZ action a short-term risk factor for the Kiwi dollar
Two weeks ago, when the NZD/USD exchange rate was sitting at 0.6800, the headline for this column was “Kiwi dollar navigates through two elections and sails higher”.
We completely underestimated the wind strength behind the currency at the time.
Instead of a gentle Sunday afternoon jibe and tact up the harbour, it has looked more like the latest Team New Zealand America’s Cup creation, Te Rehutai, flying across the water with full turbo-charged after burners turned on!
The weird situation is that the institution who has been attempting to jawbone the NZ dollar value down for the last six months to “assist the economic recovery from the Covid shock”, the RBNZ, have turned out to be the architects of the latest surge higher to 0.6930.
Of course, the RBNZ are trying to blame the markets for miss-interpreting their monetary policy messages and this is the reason why the NZ dollar has strengthened further to new highs in the forex markets.
The outcome of the increase in the NZD/USD rate and the TWI Index is the complete opposite to what the RBNZ have been trying to control with threats of negative interest rates and additional unconventional monetary tools such as buying foreign bonds as part of the QE programme.
Given these “unintended consequences” from their own actions 11 days ago, the probability of Governor Orr making a special statement to jawbone the NZD down overtly and deliberately over the next few weeks has certainly gone up several notches.
The RBNZ will not be happy that monetary conditions in the New Zealand economy have effectively tightened over recent weeks through the exchange rate appreciating.
In their eyes monetary conditions have to remain very loose and perhaps be loosened even further.
It will be no surprise that they take additional action to rectify this situation. Such action stands out as the largest risk factor for the Kiwi dollar in the lead-up to Christmas.
Local factors turbo-charge the Kiwi dollar higher
The push to above 0.6900 over the last two weeks has not been due to a stronger AUD and/or a weaker USD on global currency markets.
Those currencies have been very stable around 0.7300 and $1.1850 respectively over the period. The latest lift in the NZD/USD rate to 0.6930 has been entirely due to NZ-specific forces, as follows: -
- A number of currency speculators going in to the 11 November RBNZ monetary policy statement expecting it to produce a lower Kiwi (as this column expected). When the opposite happened, they were forced to buy back their NZD shorts.
- New Zealand and the NZD being regarded as a safe-haven destination for funds cycling out of the weakening USD and the expected turmoil in the US following the Presidential elections (which has not happened).
- Cross-border capital inflows into New Zealand increasing as business mergers and acquisitions activity suddenly ramps up with foreign buyers of NZ companies. Compared to the rest of the world, we are seen as an attractive investment destination having controlled the pandemic rather will and being hitched to the Chinese economic juggernaut.
- Whilst the trade and economic benefits are not immediate, having eventually greater access to Asian markets for our exports with the recently signed RCEP trade deal, is a longer-term positive for the NZ economy.
- Local economic data continues to come out better than expected and the various doom merchants are forced to postpone their timing of the impending company failures and economic downturn yet again. Outside of tourism, education and travel sectors, our major industries such as manufacturing, agriculture, primary export, retail and construction are now humming along very nicely. Not that there are not challenges for business folk right now with the shipping/freight supply chain under stress/delays and labour shortages across the board.
The bottom four variables listed above all suggest continuing general NZ dollar appreciation in 2021. The forecast gains against the beleaguered US dollar will be more pronounced than against other currencies. However, a sizeable NZD/USD rate pullback into the 0.6700’s and 0.6600’s has to be on the cards beforehand as the RBNZ react to monetary conditions firming up at a time when the want the opposite.
End of year profit-taking in several markets also a risk...
Another reason why the Kiwi dollar is at risk to short-term pullback is the spectacular gains posted against the AUD over the last three months.
The NZD/AUD cross-rate has increased 4.4% from 0.9100 in mid-August to the current level of 0.9500. The NZ economy or our commodity prices are not outperforming the Aussies to this extent. The NZD gains against the AUD are prone to sudden reversal as they appear speculative position-taking in nature. Do not be surprised to see profit-taking on the NZD/AUD cross-rate being cited as a factor as to why the NZD loses ground before the end of the year.
Global equity and commodity markets have recorded impressive gains since April. It would also not be surprising to see substantial profit-taking (i.e. selling) by the speculative players in these markets as they unwind their positions before the end of what has been a tumultuous year for all.
If decreasing equity and commodity prices over coming weeks do eventuate, the Kiwi dollar typically follows. A correction back in equity markets over coming weeks would also see the US dollar move back down against the Euro to $1.1600 from the current $1.1860 rate.
Given the renewed Covid lockdowns now occurring across Europe, their economies will be taking another hit, which is not positive for the Euro currency value in the short-term.
Any NZD pullback likely to be short-lived with positives in January
If we do see a NZD/USD pullback over the next month, local USD exporters should take the opportunity to top-up already high hedging levels as the typical Kiwi dollar pattern in early January is to appreciate.
Meat exporters buying higher weekly volumes of NZD through this period of reduced NZD FX market liquidity being the reason.
Potentially adding to the late December/early January Kiwi buying could be a strong bounce back in the September quarter’s GDP growth being released by Stats NZ on 17 December.
The December quarter CPI inflation number on 15 January also has the potential to be positive for the NZD with an increase well above the RBNZ official forecast of 0.20% (retailers not discounting due to short supplies).
*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.