Roger J Kerr says it seems that if New Zealand house prices are not rising, the majority of the local economic commentators do not think the economy is performing - 'jaundiced and ill-informed attitudes that do not serve the public well'

Summary of key points: -

• Impatient and ill-informed economic doomsayers hold too much sway in New Zealand
• RBA execute a perfect “Adrian Orr” wrong-footing of the financial markets
• Global fund managers continue to hedge against further USD depreciation

Impatient and ill-informed economic doomsayers hold too much sway in New Zealand

It is a sad commentary on New Zealand’s ambition as a nation that the majority of economic commentators and business journalists in the mainstream media constantly talk the economy downwards. It is like there is a competition to see who can be the most negative and pessimistic on the current state and outlook for our economy. Many seem to hold this weird predilection to convince everyone that we are headed for another recession. All and sundry are blamed for our economic underperformance, from the Government to businesses greed, to Trump, to poor productivity and to over-regulation. We did suffer a double-dip recession in 2023 and 2024 due to the RBNZ over-egging the monetary stimulus in 2020/2021 and then subsequently and consequentially being forced to shove the monetary policy brakes on too hard. An economic “own goal” for New Zealand was inexcusably scored, as all other western economies did not experience the same post-Covid economic downturn.

We are very good at making it extra hard for ourselves. However, rather than wallow in economic self-pity and despair (as the media would have everyone believe), the world and our own economy is moving on in a more positive manner in 2025. There remains constantly repeating commentary that there are still major uncertainties to the New Zealand and the global economic outlook due to Trump’s import tariffs. The uncertainty and the unknowns are supposedly holding back business investment and expansion. That may have been the case back in April on Trump’s “liberation day” announcements, however today tariffs are no longer an unknown risk factor in financial and investment markets. The only unknown is the final tariff percentage (10%, 20%, or 30%) and how the cost of those tariffs is divvied up between participants along the supply chain from the offshore manufacturer to the end US consumer. It seems highly likely that New Zealand exporters into the US will end up with a tariff at 10% or 15%, below that of most other competitor countries, therefore not losing any competitive price advantage.  Indeed, maybe even gaining some advantage. Offshore economic forecasters such as the OECD, the IMF and the World Bank are revising global growth forecasts downwards and highlighting tariff risks as the reason. However, history tells us that these forecasters are typically six to nine months behind the eight-ball when it comes economic conditions and the outlook.

Whilst currencies such as the Japanese Yen the Canadian dollar and the UK Pound Sterling may have weakened slightly against the US dollar over this last week as Trump upped the ante on getting trade deals and tariffs agreed, the overall impact and volatility from tariffs on foreign exchange markets is deescalating through time. The focus of the FX markets is now rightly coming on the divided US Federal Reserve as to their likely timing of recommencing the cutting of interest rates. The debate on how much and for how long tariffs will push up US inflation will continue, however the two dominant components of the US CPI index (rents and healthcare) are declining every month. The forward outlook on the US dollar value must remain negative as the Fed are now primed to slash interest rates three of four times 0.25% before the end of 2025. The US is well behind Europe, New Zealand and many other countries in respect to the timing of removing tight monetary policies and stimulating economic activity with much lower interest rates. The reasonably high probability of further USD depreciation from the current 97.50 on the Dixy Index toward 90.00 by December 2025 has not diminished.

The local doomsayers just appear to be overly impatient and not understanding the transmission/ timing mechanisms in the NZ economy from when the RBNZ cut interest rates until domestic spending picks up as a result. It takes over 12 months to have an impact from the time monetary easing is commenced. The RBNZ started easing policy last August, so from next month it is highly likely we will see an improvement is the retail and residential property sectors. The export sector is already on fire and business confidence levels are close to record highs. We remain with our forecast that New Zealand’s annual GDP growth rate will be over 3.00% by year-end.

It does seem that if house prices are not rising, the majority of the local economic commentators do not think the economy is performing. These are jaundiced and ill-informed attitudes that do not serve the public well.

The chart below from Topdown Charts plots global manufacturing PMI survey results (black line) against the net number of interest rate cuts globally (eight-month lead - blue line). It does not take rocket science to conclude that global manufacturing PMI’s are set to increase from the current average of 50 to above 55 (just as they have done in the last 25 years). Stronger global GDP growth will follow, the opposite of current OECD, IMF and World Bank forecasts. Monetary stimulus takes time; however, it is pretty reliable is causing the intended economic response.

The second chart below shows the overall improvement taking place over the last 12 months in the manufacturing PMI surveys in the US, China and Australia. The New Zealand manufacturing PMI fell away in April and May to a low of 47.4 (fears of Trump’s tariffs), however it bounced back a little in June (released last Friday) to 48.8. Reassuringly, new orders in June climbed into expansionary territory above 50, at 51.2. The Radio New Zealand news headline last Friday was “New Zealand’s manufacturing slump continues”. There is no doubt that the current weak construction activity is holding the manufacturing PMI index back, against the healthier improvements in local primary industry processing.

It is only a matter of a few short months before the domestic building activity levels start to improve again (lifting local manufacturing optimism) from the substantially lower mortgage interest rates now prevailing.

RBA execute a perfect “Adrian Orr” wrong-footing of the financial markets

Economic commentators in Australia are struggling to explain how they got it so wrong when the Reserve Bank of Australia (”RBA”) called their bluff and left interest rates unchanged at 3.85% last week. It does seem only a question of timing, as the RBA want to see more conclusive economic data on inflation and employment before lowering interest rates again. The Australian dollar received a 50-point boost against the USD on Tuesday 8th July when the shock/unexpected decision hit the newswires, appreciating from 0.6500 to 0.6550. The Aussie has held on to those gains over the remainder of the week to the 0.6580/0.6590 area. It does seem that the RBA want to reduce interest rates further in tandem with the US over the second half of this year, so as to not put undue downward pressure on the AUD.

Australian Prime Minister, Anthony Albanese is in China this week in an attempt to enhance their trade relationship with their largest trading partner. Global currency markets, to date, have been unwilling to buy the AUD as aggressively as the Euro, Yen and Pound against the faltering USD, as there has been a worry that Australia’s close economic reliance on China will be negative for the Australian economy as China is hurt by tariffs. However, it has become very apparent over recent months that the Chinese economy is not sagging under the weight of Trump’s tariffs. Chinese exports to the US may have decreased 30%, however they have increased their exports to Europe and the rest of Asia. Chinese exports increased by 4.80% over the 12 months to the end of May 2025. It has to be anticipated that the Australian dollar will be rerated higher as the China impediment is no longer a factor holding it back relative to the Euro, Yen and Pound.

We highlighted in last week’s report that Australian equity market underperformance relative to the rest of the world was one reason why new capital flows will now come Australia’s way. The second reason for likely AUD gains is the current speculative positioning of heavy short-sold AUD positions being held in US futures markets. These punters are betting on AUD depreciation against the USD, however that is not happening, and it seems inevitable that these currency traders will soon by buying the AUD to close down/unwind their short-sold positions. The chart below confirms that when the number of futures contracts (blue bars) moves from short to long the AUD appreciates (and vice-versa). US-based currency traders have already adjusted NZD/USD speculative positioning from short-sold NZD to marginally long the NZD. The conditions are now conducive for the AUD to follow that change.

For the above reasons the Australian dollar is expected to outperform the NZD against the USD over coming months, pushing the NZD/AUD cross-rate lower. Another strong reason why the NZD/AUD exchange rate has reversed downwards from 0.9350 to 0.9140 since March is the FX markets anticipating that Australian interest rates may not go as low as our interest rates in New Zealand. The NZD/AUD cross-rate declined from 0.9500 to below 0.9000 through the course of 2024 as the interest rate differential moved from NZ interest rates being 1.00% above those of Australia to being 0.50% below (refer to the chart below). The gap in the two-year interest rates closed back up to zero over the first five months of this year, however Australian two-year swap rates are now back up to 3.43%, above NZ swaps at 3.20%. The interest rate differential is back in favour of the AUD outperforming the NZD again and therefore lowering the NZD/AUD cross-rate.

Every year in the June to October period the NZD/AUD cross-rate is pushed down by NZ subsidiary banks of Aussie parents hedging forward their dividend payments to Australia i.e. they buy AUD/sell NZD. The decreasing NZD/AUD cross-rate over recent weeks indicates that the banks are at it again. The vertical green lines in the chart below highlights the pattern of NZD depreciation against the AUD in the June to October period each year when the banks are hedging their 30 September financial year- end dividend amounts.

The NZD/AUD cross-rate appears enroute to 0.9000 again, however history tells us that it does not remain there for long. Local exporters in AUD should have their NZD buy orders to hedge forward placed from 0.9075 downwards.

Global fund managers continue to hedge against further USD depreciation

Global fund managers in the UK and Europe are not only reducing their investment asset allocations/weightings to the US markets (i.e. selling the USD as they exit), but they are also increasing the FX hedge ratios on their investments that remain in the US. Fund managers in Asia will be doing the same. They are hedging against expected continuing USD depreciation as Trump’s tariff policies damages the US economy, and the period of US economic exceptionalism comes to an end. Foreign investors hold more than US$30 trillion in US securities, approximately US$17 trillion in equities and US$13 trillion in fixed interest/bonds. Therefore, it is easy to see that just a small percentage adjustment in weightings to US investments can have profound impact on the FX markets and the USD value.

The pattern of movements in the USD Dixy Index over recent months is that every small recovery back upwards is hit with a barrage of USD sellers as the fund managers maintain their strategy to hedge higher amounts of USD exposure. The USD Index has recovered marginally from below 97.00 to 97.50 over this last week as Trump blasts out further threats and ultimatums on tariffs.

A further reason as to why foreign fund managers are reducing USD exposure is the real threat to the independence and credibility of the US Federal Reserve. Trump has continued his attacks on Chair Jerome Powell to lower interest rates, and his next step could be to appoint Powell’s replacement will ahead of the May 2026 date. Deutsche Bank currency strategists do not think the FX markets are pricing enough of this risk into the USD value. They foresee the USD index depreciating another 3.00% to 4.00% from the current 97.50 level if and when Trump loses his patience and makes an early appointment that would throw the Fed into some disarray. The Fed’s creditability is lost when the new Chair-elect is likely to be a Trump stooge that will talk about the need for lower interest rates immediately. Watch this space.

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