By Roger J Kerr
It is very instructive for the future direction of the NZD/USD exchange rate that the Kiwi was unable to hold onto the marginal gains it made when the RBNZ announced their second 0.25% OCR increase last week.
The interest rate increase was totally expected and the accompanying statement from the RBNZ Governor was as bland as it could be, however the Kiwi was bid up from 0.8570 to 0.8630 when Asian FX markets opened and the carry-trade related buying emerged.
However, in the following London and New York currency market trading last Thursday the Kiwi dollar gave back it gains and slipped down to 0.8560.
Yet again, it seems that global hedge funds are reluctant to buy the NZD above 0.8600, particularly after the decrease in the economy’s major export commodity price.
As anticipated, the RBNZ did mention the sharp 22% reduction in wholemilk powder prices and the fact that the actual annual inflation starting point at 31 March 2014 was lower than expected in their OCR statement, however not in a way that suggested that they are as yet revising down their GDP growth forecasts and inflation forecast.
They need to update their official economic forecasts and will be doing this over the next six weeks ahead of the next full Monetary Policy Statement on 12 June.
Dairy industry sources do not expect any rebound upwards in the milk powder prices in upcoming Fonterra GDT on-line auctions as globally traded supply continues to outweigh Chinese demand.
The divergence opening between tumbling dairy prices and a NZD/USD exchange rate stubbornly above 0.8500 is a clear negative for GDP growth prospects as the dairy farmer milksolids payout dives from $8.60 this season to potentially below $7.00 next season.
Your largest industry cannot have a 20% reduction in income without some downstream negative economic consequences.
Currently those consequences seem to be underestimated by the business media and economic commentators in New Zealand.
A pull-back in the NZD/USD exchange rate to below 0.8500 will break a key technical support level and further depreciation to below 0.8200 will have the chartists turning emphatically negative.
Strong immigration inflows into New Zealand are positive for the currency with less people leaving and taking their money out and new immigrants bringing funds in. The net inflows also put demand pressure on the housing market in Auckland where additional supply is still struggling to match the increased demand. However, it seems that the upsurge in house prices that the RBNZ worry about the inflationary impacts is running out of steam in 2014 as the LVR restrictions and rising mortgage interest rates make it more difficult for property buyers.
Over coming weeks two important announcements that are likely to be negative for the NZ dollar are the US jobs numbers on 2 May and the Australian budget on 13 May.
The lead-indicators for US employment suggest that next week’s Non-Farm Payrolls increase is likely to be a very strong figure above 250,000. Such an outcome should finally be seen as positive for the USD on world currency markets.
The EUR/USD exchange rate has just not moved away from $1.3800 over recent weeks with the Federal Reserve’s dovish words counteracting the continuing stronger economic data in the US. The Fed meets the day before the jobs numbers on 1 May.
The Australian budget statement from Federal Treasurer Joe Hockey is going to be an austere affair with spending cuts and some tax increases as the deficit problem is addressed head on.
Such fiscal policy measures are hardly positive for the Aussie economy and it appears already that offshore players in the AUD are reducing positions in expectation of future AUD weakness. Australian inflation to 31 March was like ours, less than forecast, which pulled the AUD back below 0.9300 against the USD. The AUD has not been able to sustain its gains and appears susceptible to further weakness as the USD appreciates on global forex markets over coming weeks.
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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
1 Comments
Wrong way round?
Lets assume as implied that $8.65 is a normal payout. (Fonterra tell us by the book that it should really be $9.65 - ish…).
Over the next year some folk are thinking WMP could be $4,200 to $4,500 US/ton (still elevated prices). . Depending on how sidelined buyers restock (what price they come back in at – naturally these ldc’s would prefer sub $4,000), and how China buyers act they don’t like $5,000 plus, but the at the same time they are sailing Lucerne from USA . (RK you could ask your industry sources where the hedge is).
However imagine:
$4,200 at 0.86 = $6.35
$4,200 at 0.75 = $7.56
(and nothing wrong with $4,200)
But $5,400 at 0.75 = $10.28 (as If)
And $3,700 at 0.86 = $5.36 (we may be some time)
Maybe we need disagree with claims that actions that increase the fx rate are positive for the currency. Why is a high currency good?/ For whom?
So: trade flow, v investment (Hedge fund punting and Ozzie bank mortgage pumping).
Is it a case of each addition high lvr loan given in Auckland reduces export income and delays loan repayment/or production expansion in the heartland (further weakens the financial system?). - may be there is good GDP growth and bad GDP growth?
This then leads the conversation into our locked in and increasing cost structures and then multi tasking interest rate movements (increasing costs and reducing income in one).
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