By Roger J Kerr
"Be careful what you wish for!" would be an apt description of our call over recent months for the NZ dollar to depreciate from the mid-0.8000’s to the 0.7800/0.7700 area.
True to form, the Kiwi dollar has depreciated faster and further than the expectation, however one can never be too surprised at the Kiwi dollar over-shooting (both ways!).
The 7 ½ cent fall to 0.7560 from above 0.8300 just two weeks ago is well overdone in my view and a correction upwards on profit-taking is overdue.
Falling global sharemarkets, energy prices, commodity prices, EUR/USD exchange rate, AUD/USD exchange and expectations of interest rate cuts in NZ are all behind the NZ sell-off.
If there was an expectation that those variables will all continue to same way, then further falls on the NZD value would follow.
However, all the aforementioned prices have come a long way in a short space of time and there is a greater probability of correction/consolidation in the short-term than the selling continuing.
The global economic situation right now as it affects the NZD/USD value can be summed up as follows:
- The weekend’s G8 meeting may have been another talkfest, however President Obama has clearly signalled to the Europeans that they need to stimulate growth with easier monetary policy as well as the Government’s austerity measures i.e. the ECB should cut interest rates.
- Weaker than expected Chinese industrial production may have sparked the AUD and NZD sell off a couple of weeks ago, however the Chinese authorities have stacks of monetary and fiscal firepower to prevent any prospects of a "hard-landing" for their economy. The change of political leadership in China this year means that they will not undershoot their GDP growth targets - that is, do not expect Chinese economic data to deteriorate any further. Chinese steel production has started to increase again over recent weeks and they are back buying raw material commodities again (coal and iron ore) at the lower prices. The HSBC manufacturing PMI survey of medium Chinese businesses this week may be more positive than recent numbers.
- US economic data continues to improve, particularly at the household retail, jobs and housing level. Once Wall Street gets past the hype of the Facebook IPO and the fall-out from the JP Morgan trading losses, investor confidence should return which would be positive for the Kiwi dollar.
This week’s NZ Government Budget will be a subdued affair with shuffling of spending priorities and what GDP growth number they are using in their fiscal forecast assumptions will be the areas of interest. There is no new money for innovative initiatives as tight fiscal management is the order of the day.
Does all this mean the Kiwi dollar will bounce off its lows of 0.7520 recorded on Friday night? I think it will, as the Asian central banks and sovereign wealth funds who were happily investing in NZ bonds at a 0.8100 exchange rate entry a few short weeks ago, have to be keener than ever to come in below 0.7600.
Concerns about the risk of a global double-dip recession will abate in my view and locally the moneymarkets will realise at some point that Alan Bollard will not be cutting the OCR as the currency has come back.
The Kiwi dollar may have one more negative hurdle to overcome this week as Fonterra release their new 2012/2013 milksolid payout forecast on Wednesday. The forecast payout will be around the $5.50/kg area, a significant reduction on recent year’s dairy farming incomes.
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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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2 Comments
On fair value, which in my opinion is reflected in the current account (which of course remains in a very significant and unsustainable deficit), the NZ dollar remains at least 20% overvalued against most currencies.
Since the end of 2008, when coincidentally the Nats came in, the NZ Dollar has appreciated by 22% against the GB Pound, 25% against both the USD and the Euro. Only against the Aussie have we depreciated- by 12%. (The Aussies have more fundamentals to back their rise, although also are too high for their own good in my opinion). We have blown, Greece like, all the extra value implied in this inflated currency
The first 3 countries/ areas have aggressively managed their exchange rates to maintain their competitiveness; including by printing money.
We have maintained a high dollar by borrowing massively offshore; or selling assets. Any suggestion it is high because of economic fundamentals is absolute b**locks. Apart from dairy prices coming off, just maybe the financial world realises the NZD is not a currency you wish to hold when the music stops, which just could be very soon, given we no longer own anything useful that is not mortgaged to the hilt.
Assuming we do wish to own something useful over time, we should be celebrating a small recent drop, and looking for more. I'm guessing the Nats and Reserve Bank do actually realise this, but are hoping they can keep fooling everyone for another three years. I'm afraid Roger Kerr is stuck in a paradigm that will fast come to a close.
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