By Roger J Kerr
Things cannot be too bad for the New Zealand economy right now when the currency value increases 3.5 cents in a week.
However, listening to media reports about the RBNZ Monetary Policy Statement last Thursday you could be excused for concluding that our economy was really struggling with an even gloomier outlook - that is, the opposite to what the currency markets are telling us.
There seems to be a competition running amongst so-called economic forecasters as to who can have the most pessimistic outlook for our economy with talk of Europe’s impending collapse and thus global growth and commodity prices also collapsing, sending us to sackcloth ruin and despair.
These doomsayers, in my view, fundamentally miss-understand what drives the NZ economy and our place in the world.
The currency value is going up because the rest of the world see us a secure/safe place to have their money invested based on superior economic fundamentals and low Government debt to GDP ratios. I will always take what the financial markets are telling us as a more accurate reflection of the future direction than cosseted economists who seemingly want to talk the NZ economy down at every opportunity as they have forecasted weaker growth than what is actually occurring.
Having identified a 0.7500 to 0.7900 trading range for the NZD/USD rate over coming months, it is however, a little disturbing to see the Kiwi test both ends of the range within one week!
The Kiwi should encounter major resistance at around the 0.7950 level.
Exporters in USD’s who did not lift currency hedging percentages to maximums when they had the window of opportunity at 0.7500 over recent weeks should really be questioning how they make decisions on currency risk management.
While NZD/USD exchange rates back above 0.8000 are more probable in 2013 than over coming weeks/months, there are many good reasons why we do not see large-scale downside risk for the Kiwi dollar below 0.7500 in the short/medium term:
- Despite the local moneymarkets still pricing in a 0.25% cut to the OCR, the probability of Europe completely imploding has reduced and eventually the interest rate markets will realise that our growth/inflation outlook is far from being negative.
- If Europe was about to collapse, the Euro would have plummeted against the USD by now. It hasn’t, the EUR/USD rate appears to be consolidating in the $1.25 to $1.30 range. The ECB is expected to cut their interest rates and that will return the EUR to $1.25 and thus keep the NZD/USD rate around 0.7700/0.7800.
- A stronger USD and weaker Chinese economic data have pulled global commodity prices down over recent months. It is difficult to see the commodity prices falling a lot further when China can underwrite and ensure their demand/growth with further monetary and fiscal stimulus policy actions. The Fonterra Wholemilk Powder auction this week should indicate that the bounce back upwards in prices two weeks ago was not a one-off event.
If Thursday’s GDP growth number for the March quarter is less than +0.30% the Kiwi will retreat back.
A result above +0.60% would send the Kiwi higher.
However, looking forward, stronger manufacturing, agricultural production and construction/property sectors bode well for the NZ economy expanding by closer to 3% over the next 12 months, thus underpinning the NZD value and eventually pushing it higher when interest rates are inevitably increased in 2013.
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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
Roger,
What is good about a dollar rising again? Who benefits? I understand that we consumers sort of do in the very short term; but which industries apart from your own currency exchange business win from this? New car dealers perhaps? Outbound airlines, maybe?
Overseas suppliers; certainly? Currency speculators, absolutely? Foreigners looking to make a few free bucks off our rather naive selves, for sure. Am not sure exporters, manufacturers, tourism suppliers see any upside, but plenty of downside.
And when the music stops, make no mistake, we consumers will lose. We as a country are already losing $15 billion a year in overseas transfers because we have spent too much too long on the back of an overinflated currency; and open doors to foreign money with no conditions.
When our current account is say positive 2-3% of GDP for a couple of years, I will be all for a stronger currency. But that's dreamland for now.
What do you think of the IMF logic stating a need for a 20% devaluation? Makes sense to me.
Roger, our socalled soveriegn dollar is directly tied to the USD. Only they get to print, have you noticed? bringing their dollar down in value which makes everyone elses too expensive.
Now, what if NZ was to print? Well we would very quickly find our relationship with the US on tenderhooks particularly with the US FED who we have done $billion dollar credit swaps with .........and they want their interest paid in full for the term agreed.
If we even tried to undercut them by printing ourselves, they would screw us over any way they could via cutting off trade, credit & insurance lines, investment in their industries, they might even stop Air NZ flying in if they chose to get real nasty..........and they are more than capable
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