By Roger J Kerr
The New Zealand dollar appears impervious to both local and international economic news that ordinarily would be pushing it higher or lower against the USD.
The Kiwi has established a tighter and tighter trading range between 0.8050 and 0.8400 over recent months.
The currency has rebounded off the bottom on several occasions for all very good reasons; however it does not seem to attract many fresh new buyers above 0.8400 to send it higher.
Foreign exchange market positioning in the Kiwi dollar has seen it retreat from 0.8400 on several occasions, the last occasion being when the RBNZ did not raise (they were never going to) the OCR in late January.
The last rebound upwards from 0.8050 to the current 0.8380 level being caused by the RBA shifting their forward monetary setting guidance from “easing” to “neutral” bias, sending the AUD zooming up from 0.8750 to 0.9050 against the USD.
The Kiwi dollar followed the AUD.
In the short-term, the Kiwi should be constrained from going any higher above 0.8400 by the fact that the RBA will be none too happy that the AUD has appreciated back above 0.9000 when they have painstakingly jawboned and orchestrated a lower dollar and have publically stated that they prefer the AUD in the 0.8000 to 0.8500 region against the USD.
Countering any negatives from offshore for the Kiwi in the near term is the fact that the NZ economy is really humming along with strong growth, increasing employment, high primary export commodity prices and rising interest rates in 2014.
There are no local reasons to be selling the NZ dollar, however there is a strong argument that all the positive news on the economy is already largely priced-in to the NZD value in the currency markets.
Outside the economic, monetary policy and investment capital flow factors that move the Kiwi dollar around day-to-day and week-to-week, an often forgotten variable is foreign investor confidence.
New Zealand relies heavily on voluntary capital inflows to fund the Balance of Payment Current Account deficit.
Maintaining the confidence of those international investors revolves around credit ratings, consistency and certainty of economic policies and overall economic growth performance.
Any loss of foreign investor confidence causes the NZ dollar to depreciate and interest rates to increase.
New Zealand has enjoyed very favourable confidence levels from foreign investors since the GFC as we did not have a debt/banking crisis and the economic reforms for monetary and fiscal policy instituted in the 1980’s and 1990’s stood us in very good stead to weather the global economic and financial storm.
However, time has moved on and foreign investors currently holding NZD investments can always leave town if they do not like particular developments within New Zealand that make our economy more vulnerable or susceptible to changes that would not be positive.
In respect to global investor confidence in New Zealand there are two looming issues that have the potential to take the gloss off our attractiveness as a destination, hence downside risks for the currency:-
1. Unintended consequences from an OECD-led crack down on tax avoidance
Local media reports are that NZ banks may find they are caught up in the global campaign against multi-national corporations shifting their profits to low tax regimes. Local banks fund wholesale offshore through tax conduits to minimise the 2% AIL (Approved Issuer Levy) on interest paid and these structures may be outlawed by the global rule changes.
Rule changes on taxation are the last thing foreign investors and foreign lenders to NZ banks want to see and if implemented the dollar could fall, even if interest rates increased as a consequence.
2. Political risk on a possible change of government in NZ
Should the Labour/Greens political combo start to lead in the political opinion polls come June/July, foreign investors in New Zealand may well start to hedge their bets by withdrawing their money.
Normally, general elections and even changes of Government come and go in NZ without risk of disinvestment as the foundation economic policies of monetary and fiscal policy are not changed or at risk of changing. The election in November this year could be different.
The stated manifesto of the Labour Party is that they will widen the brief of the RBNZ to not only keep inflation under control, however also have growth and employment objectives. Furthermore, the RBNZ will have wider powers to intervene directly in the NZ dollar FX markets to reduce volatility (good luck with that!).
More disturbingly for offshore investors, the decision making powers on moving official interest rates to set monetary policy will be shifted from the independent RBNZ Governor to the appointed RBNZ Board of Directors.
It is not hard to guess who will be on the RBNZ Board under a Labour/Greens coalition government.
The NZ dollar has failed to appreciate over a period when the economy has been close to “boom” mode, given the factors described above the risks from here appear more to the downside.
-----------------------------------------------------------
To subscribe to our daily Currency Rate Sheet email, enter your email address here.
Daily exchange rates
Select chart tabs
Roger J Kerr is a partner at PwC. 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
9 Comments
That is an interesting perspective Roger; that the dollar should have strengthern more on strong fundamentals. Is it possble we are seeing some hedging against all the consistent downside risk analysis of the kind bleated on this very web site?
For myself I can't help but think since 2009 our dollar has been carried up and down on the general risk tide of USD flow in and out of the US and this has trumped economic fundamentals every time.
The strength or otherwise of the NZ dollar has little to do with the perceived strength or weakness of the NZ general economy. At 4 million population we are a mere blip/small city size compared the US QE, fluctuations of Asia & emerging markets currencies, Australia, EU etc etc. We merely bob about according to world markets, currencies & relative usefulness as a safe place to park $$$, and exploit our super high interest rates (for a 1st world economy).
Our dollar could be 75c or 90c US - depending largely upon External factors.
National/ Labour / Greens / tight budget, loose budget, OCR 2.5, OCR 3.5 whatever, it will have very little effect compared to the machinations of the large players & investment entities.
Great column.
Oh, wait. It isn't intended as satire.
Putting aside the takehome repeated through the piece "If you think the dollar is too high you should vote Labour/Greens as thier very presence will drive down the dollar" as not being testable, there are a couple of points we can look to actual evidence-
Can anyone think of three econmically stable democratic countries that markets have deserted upon them electing a leftwing government. I say econmically stable to exclude ones like Iceland, where the right-wing government had already crashed the economy before the left-wing one was elected. I am really looking for any examples of a transition when things were stable. How about 2 countries? 1? I can certainly think of a bunch of examples of orderly transitions of power between left and right that international markets didn't care about.
Also can anyone think of an example of markets deserting an economy where the countries monetary policy is set by a board? Again, international capital doesn't care. As commenters above have noted NZ is a medium city/ small US State (we are Iowa last I saw) and most of the things that affect us do so almost by accident- big econmies doing bigger things and we are caught in the wash.
Still, there is one easily testable thing in this article "Should the Labour/Greens political combo start to lead in the political opinion polls come June/July, foreign investors in New Zealand may well start to hedge their bets by withdrawing their money." So NZ Government Debt auctions should go badly from June/July onwards. I predict, on the contrary, that the markets don't care and nothing unusual will happen.
the economic reforms for monetary and fiscal policy instituted in the 1980’s and 1990’s stood us in very good stead to weather the global economic and financial storm. Isn't that the time where we aligned ourselves with TPTB? Pretty much as dh outlines.
Roger I caught a comment on DailyFX at the end of last week that unfortunately I have been unable to find again. It was something to the effect that a big swing has occurred in the sentiment for the NZD, something along the lines of traders now 7.6:1 short.
We welcome your comments below. If you are not already registered, please register to comment.
Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current comment policy is here.