Roger J Kerr says business confidence is falling because of the fear of re-imposed lockdowns as Omicron approaches. But he sees the NZD & AUD rising on USD weakness. Still, a tougher 2022 is on the cards, he says

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.

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