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.
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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