Summary of key points: -
- Here we go again ... is another lockdown likely?
- Latest US Dollar/Euro price action supports a USD turning point
- Encouraging signs for the expected AUD recovery
Here we go again…..is another lockdown likely?
There appears to be particularly good reasons as to why consumer and business confidence has been falling away in New Zealand over recent months. For most there is a just a feeling of “deja-vu” with the inevitable entry of the Covid Omicron variant into the community and the Government’s only health/economic response to that being to lockdown entire cities - yet again. The sheer uncertainty as to what is going to happen in the future is still adversely impacting sentiment and confidence.
The more optimistic contingent are hoping that the Government has taken on some lessons from other countries on living with the infectious virus and have moved on from such draconian control measures. Unfortunately, our bureaucrats at the Ministry of Health continue to move at their own pace, ignore what has worked elsewhere in the world (e.g. Israel) and ignore technology solutions from the private sector. As a consequence, we still have the majority of our MIQ facilities (where foreign arrivals carrying the virus are quarantined) in the middle of our largest city and therefore the inevitable leak leads to major health and economic impacts. Nearly two years on from the original Covid outbreak, we may be better prepared with high vaccination levels, however, we have done nothing to rectify the injustice of our inadequate MIQ system preventing NZ citizens returning home.
For the NZ economy this year is going to be different to the artificially positive economic outcomes in 2020 and 2021 where massive monetary and fiscal impulses drove spending and speculation. The hangover to the party is now setting in with bank credit considerably tighter, monetary conditions tighter with rising interest rates, house prices no longer rising, labour shortages limiting growth in productive output and shipping/freight frustrations only slowly improving.
The business and economic mood is much more subdued and will remain that way until the Government can take a lead on when and how the borders can fully re-open for immigrant workers and foreign tourists. Do not hold your breath for that to happen anytime soon!
Local economic data releases over the next week should further confirm a slower pulse with the NZIER quarterly survey of business confidence on Tuesday 18th, electronic card retail spending for December on Wednesday 19th and manufacturing PMI from December on Friday 21st.
Weaker than currently forecast GDP growth for the NZ economy over coming months should result in the RBNZ lifting interest rates at a slower pace than currently priced-in by the markets.
If the NZ dollar value was solely determined by local factors that would suggest a depreciating trend. However, this column continues with its long-held view that the USD side of the NZD/USD exchange rate equation totally dominates direction. A weaker US dollar on the global stage over 2022 and 2023 remains as our call and therefore local USD exporters need to be well hedged against that risk, even though the NZ economy will be under-performing peers.
Latest US Dollar/Euro price action supports a USD turning point
It may have been seen as counter-intuitive to many that the US dollar would weaken across currency markets following the release of December’s US inflation numbers that recorded the highest annual inflation rate in 40 years. However, the weaker USD from $1.1300 to a high of $1.1480 against the Euro last week was a classic “buy the rumour, sell the fact” FX market outcome. The USD had been bought up on an expectation of the inflation result being above prior forecasts. When that did not happen with the result bang on forecasts, the USD long position holders were disappointed and sold their USD’s back.
The NZD/USD rate jumped up from 0.6750 to a high of 0.6885 on Friday 14th January, however, it has since retreated to 0.6800.
Last weeks’ FX market price action adds confirmation to our view that the Federal Reserve’s interest rate increases this year are already fully priced into the US dollar value. Therefore, the likelihood of a major USD/EUR rate turning point to a weaker USD trend over coming weeks/months is enhanced. Historical currency analysis indicates that the US dollar is more likely to weaken from the point the Fed actually increases interest rates as FX markets continually price economic events/conditions occurring in 12 months’ time into the exchange rate today.
The adverse impact of substantially higher prices for most goods and services in the US economy was witnessed through their December retail sales decreasing 1.90% on the previous months (prior consensus forecasts were for a flat 0.00% change). Industrial and manufacturing production was also weaker than forecast in December as the spread of the Omicron variant disrupted job attendance.
The forex markets will now be focusing on the US December quarter GDP growth numbers on Friday 28th January.
Encouraging signs for the expected AUD recovery
The Aussie dollar was a major beneficiary of the weaker US dollar last week, the AUD appreciating against the USD to a two-month high of 0.7300 on Friday 14th January. A movement in the AUD/USD rate to above 0.7400 over coming weeks will signal a break-out of the downtrend line on the charts that has run down from the high 0.7950 last March and the spike up to 0.7550 in October 2021.
The Reserve Bank of Australia’s (“RBA”) meeting on February 4th now stands as the catalyst to propel the AUD higher if they change their wording on interest rate hikes only marginally (which we expect them to). The Australian dollar value was suppressed over the second half of 2021 as the RBA held their stance of no interest rate increases until 2024 (diametrically opposed to all other central banks, except Turkey!). Upcoming economic data that will sway the RBA to relinquish on their out-of-date monetary policy stance includes December employment on Thursday 20th January and December quarter CPI inflation figures on Tuesday 25th January.
Daily exchange rates
Select chart tabs
*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.
33 Comments
Hey Roger, NZ's COVID response is actually the envy of the world. Not sure if you realise that or not, given the drivell you've written in this column (and last week's), it would suggest not.
The headline of this article is really enough to show you how wrong you are: https://www.theguardian.com/australia-news/2022/jan/13/code-red-melbour…
‘Code red’: Melbourne businesses say Omicron wave more damaging than lockdown
A few months is optimistic, more likely to be weeks.
I suspect we will still do comparatively better than the rest of the world, precisely because we've had the time to prepare, and the populace generally believes in science and will listen to government restrictions.
Which is the entire point I'm making, btw. There is no universe where a country gets infected with COVID-19 and everyone just goes on their merry way, and if it weren't for the government lockdowns things would be so much better. People get sick and can't work. People are too afraid to go out and spend money for fear of getting sick. In Australia, the lockdowns were better for them than omicron has been. Roger doesn't appreciate that.
I guess we would have to determine what a better course of action should look like and whether something of this nature isn't always going to be history altering.
For instance, it's very difficult to argue closing borders isn't effective, the bigger question mark is the nature of the border, such as "should most of it be located in major population centres".
Envy of the world? That's history. The overseas kiwis who were largely previously proud of Jacinda have done a complete u-turn.
Notice how msm hardly cover stranded kiwis?
Notice how the hundreds in Aus who went recently without miq spots are being ignored by msm?
The media in NZ is not a good source to measure the mood. Its all going to social media know as msm are no longer the 4th estate, but govt pr company.
Never ceases to amaze me that there are real life people alive today who genuinely believe that the job of Governments and the general population is to serve the needs of the elite.
The more business leaders and investors scream at the slaves to get back to work and the sheeple to get back to consuming (regardless of the cost to human life), the more people will wake up and see the real world they live in.
I does certainly seem like Covid is entering endemic stage, short of a new variant upending what we are seeing elsewhere.
So far on the surface it appears our approach to protect the health system and population has paid dividends, so it's really going to be the next few months that will test the governments response to Omicron in NZ.
You can do as many rounds of wage subsidy as you want and lower as much interest rate as you want, but when all other countries tighten up their money supplies, your money will become worthless... What's the point that everyone becomes millionaire when one burger costs $100?
Lockdowns are pretty much guaranteed. Since the Govt has banned the importation and use of RATs and only approved 4 of them for Govt use, while only bothering to purchase a tiny 5 million of them, they will be unable to test 90% of the people who contract Omicron. There is a world wide shortage of RATs and NZ has practically none in stock and is still refusing to allow private companies to import their own from some of the other hundred or so manufacturers of them (all approved by the EU/US/Asian regulators already).
And if you cant test them, you cant isolate them, or perform any contact tracing, testing or isolating of those contacts, so the only option left will be to lockdown everyone. I'm already seeing the media doing the job of preparing the populace for the return of lockdowns, or as they are to be called now, "Stay At Home" orders. This Govt is a farce.
I am very bearish on the NZ economy.
If it tracks well, then OCR will rise quite a bit more to 2.25% or more - and this will pull growth back quite a lot.
It is doesn't track well, then it's just going to struggle along. The OCR won't be increased much (might rise to 1.25 to 1.5%), and inflation will run away = stagflation.
I guess the third scenario is that the economy is middling, in which case the OCR rises a bit (to 1.75-2%), the economy is not bad but not good, and inflation is tamed a little.
The majority seem to side with the third scenario, I'm going Scenario 2.
"when and how the borders can fully re-open for immigrant workers and foreign tourists."
I note the word fully and can only hope that the response is never. Clearly Roger Kerr has learned nothing. Of course we will always need immigrants, particularly those with special skills, but in limited numbers only and we certainly don't need mass tourism. Again, we want tourists but simply fewer of them.
NZ needs to be as far up the value chain as possible in every sphere of activity. It's a cliche, but true nonetheless, we need to work smarter, not harder.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.