By Roger J Kerr
Having depreciated 14 cents from 0.8800 to 0.7400 over recent months and then rebounded four cents upward to 0.7800 over recent weeks, the question is where to next for the Kiwi dollar exchange rate?
In the very short term whether the NZD/USD rate returns to 0.7400 or continues up to 0.8000, depends on the RBNZ’s view on the New Zealand economy for 2012.
If they forecast +3.00% GDP growth for 2012 local interest rates could be heading higher earlier than market forecasts, thus the 0.8000 exchange rate outcome.
However, if the RBNZ lower their 2012 GDP growth forecast this week to say less than +2.00% and indicate that interest rates will not increase until 2012 then the return to 0.7400 exchange rate scenario is more likely to play out.
The RBNZ quarterly Monetary Policy Statement on Thursday 8 December is therefore under more scrutiny than normally is the case.
The timing of interest rate increases from the emergency stimulus OCR levels of 2.5% put in place in March 2009 is crucial for the direction of the NZ dollar over the next several months.
Governor Bollard has stated several times this year that he is keen to remove the emergency stimulus interest rates, however the earthquake in February and the European debt crisis in recent months has stymied his plans.
The RBNZ would be making a major monetary blunder if they followed the view of the 'perma-pessimists', NZIER who are forecasting no interest rate increases until 2013 due to a weak economy going forward.
The global influences on the New Zealand economy are unquestionably to the downside at the moment with Europe descending into economic recession and there being no certainty as to how much that will slow the US and Asian economies down.
On this count the RBNZ could justify a lower GDP growth forecast for NZ in 2012. However, positive local developments cannot be ignored when firming up a view on how our economy will track in 2012.
The export sector continues to drive the overall economic performance and three major variables are all very positive for stronger export-led growth from here:
- Export commodity prices have come back from their extraordinarily high levels earlier this year; however remain well above historical averages. Fonterra will be working hard to arrest the fall and stabilise Wholemilk Powder prices and as they are a major player in the globally traded market they are likely to succeed by controlling supply onto the market.
- The exchange rate deprecation from above 0.8000 to the mid 0.7000’s is seen as positive for exporter NZD prices, profits and business investment.
- Very favourable weather conditions over the last 12 months have produced fantastic agricultural growing conditions and therefore bumper production volumes. Most economists completely underestimate this crucial aspect of the NZ economy.
While the above positive forces may not be immediately recognisable to the financial markets or the RBNZ, as we move into 2012 the realisation will come and thus the timing of interest rate increases recalibrated to mid-2012.
New Zealand is likely to be the only country raising interest rates at that time; therefore the Kiwi dollar will again become the focus of attention for global investors chasing an appreciating currency with a nice yield return.
Higher GDP growth and higher interest rates in a sluggish world economic environment must make the NZ dollar standout again as a natural 'buy' for hedge funds and currency speculators. Exchange rates are relative prices, and relative economic comparisons will have New Zealand looking pretty good against other struggling economies in 2012. As always, the forex markets will price-in interest rate increases well before they actually happen in June 2012.
The major risk to the positive NZ dollar view is the economic fortunes of China (and thus Australia).
Recent action by the PBOC to ease back on monetary settings has reduced the probability of a 'hard landing' for the Chinese economy from the monetary tightening earlier this year. A soft landing for the economy now appears the likely outcome, however weaker PMI manufacturing figures do point to Chinese export factories reducing production as demand from European export markets reduces.
The collapse of the price of forestry logs being imported into China was an early indicator of slower export manufacturing activity as the imported logs are used for wooden freight pellets. Further falls in the Chinese manufacturing PMI Index over coming months would be worrisome for commodity prices, therefore negative for the Australian and New Zealand currencies.
The NZ dollar received a temporary boost last week when six central banks coordinated on providing more liquidity to European banks by cutting inter-bank swap market margins.
Investment markets were suddenly back to 'risk-on' mode and that always attracts NZ dollar buyers. However, as many economic commentators have stated, monetary measures are only temporary rescues to Europe’s debt problems. The markets will be looking for more permanent fiscal solutions from the European leader’s summit this week.
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* Roger J Kerr runs Asia Pacific Risk Management. He specialises in fixed interest securities and is a commentator on economics and markets. More commentary and useful information on fixed interest investing can be found at rogeradvice.com
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