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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