Roger J Kerr says despite the diverging economic paths, the NZD and the AUD will both find their own separate lower levels against the USD

 By Roger J Kerr

Movements in currency markets over the last week have reminded us once again as to the stark contrasts in performance of the New Zealand and Australian economies at this time.

The NZD/AUD cross-rate rebounding from the 0.9200 area to 0.9400 again as the economic and corporate news-flow out of New Zealand was all positive compared to the continuing negative reports coming out of Australia.

The New Zealand economic success story commenced last week with another significant increase in the Fonterra milksolids pay-out to dairy farmers, followed by upbeat immigration numbers, building consents and record high business confidence levels.

The NZ dollar made strong gains in the forex markets to above 0.8400 as a result.

In direct contrast, the AUD was under downward pressure against the USD from private capital expenditure being weaker and slower than expected Chinese economic data weighing on the currency.

The AUD has recoiled rapidly from the highs of 0.9050 against the USD two weeks ago when the RBA shifted their monetary outlook from “easing” to “neutral” and now trades below 0.8900 again.

Capping off the diverging trans-Tasman economic performance was Qantas Airways announcing a loss for the half-year and the possibility of 5,000 job losses as they are forced to restructure. The Qantas job cuts come on top of the Toyota and Holden car manufacturing factory closure announcements, Alcoa closing its Port Henry aluminium smelter with the loss of 950 jobs and similar mining jobs retrenchment in diamonds and coal.

Rubbing salt into the wound of Kiwi/Ocker rivalry was the simultaneous profit announcement from Air New Zealand confirming an airline on the front foot, assisted by a New Zealand economic tailwind.

Because Australia has not had to face an economic recession since 1990, its businesses (with associated industrial/labour agreements) have never had to make serious adjustments to their respective cost bases.

Successive mining booms have disguised and postponed their growing un-competitiveness on the global stage.

It appears that the Australian dollar will have to depreciate well below 0.9000 to the low 0.8000’s against the USD to restore competitiveness and replace the lost GDP from major mining capital projects coming to an end.

The NZD/USD reached its own major resistance level above 0.8400 on Friday 28 February and has rapidly recoiled to 0.8350. The NZD/USD has not traded below 0.8000 for six months now and has held the higher levels due to positive NZ economic data, capital/speculative flows moving out of AUD’s and into the favoured NZ dollar and US economic data suffering from the severe winter climatic conditions.

The USD has been unable to make ground against the major currencies, only gaining against Emerging Market currencies with their own economic problems.

Looking ahead, the question for the NZD/USD exchange rate is whether the favourable economic news can continue in New Zealand and will the winter chill pass for US economic news?

1. There are several reasons why NZ economic performance may already be in a position of “this is as good as it is going to get” situation.

Rising home mortgage interest rates and the success of the LVR regulations to slow housing market activity should pull back discretionary consumer spending as the year progresses.

Wholemilk powder prices are forecast to correct downwards later in the year. Our largest export market, Australia, now has major challenges for us of weaker demand and an adverse NZD/AUD exchange rate above 0.9000.

2. The US Federal Reserve is reserving judgment as to whether their weaker employment and retail sales numbers from the adverse winter climate over the last two months are just temporary blips that will correct, or something more negative for US economic growth in 2014.

The monthly increase in US jobs should return to a healthier figure above 150,000 in February when the Non-Farm Payrolls figures are released on Friday 7 March.

The US dollar itself can be expected to appreciate as the US economic numbers improve from the thaw in the winter freeze.

The USD will also benefit from the uncertainties emanating from Russia exerting itself into the Ukraine as they fear their neighbour shifting to a pro-EU and NATO alignment.

Local eyes will be on the words and inferences from the RBNZ Monetary Policy Statement on March 13^th. 

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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