By Roger J Kerr
It is both highly instructive and very telling that the NZ dollar has been unable to attract the international safe-haven investment flows from an uncertain Europe that has pushed the Australian dollar higher over this last week.
Global investors now have an entirely different perception of the NZ dollar and the NZ economy compared to 2013 and early this year when the Kiwi dollar was favoured by them over the Australian counterpart.
The NZD/AUD cross-rate climbed dramatically from 0.8000 to 0.9400 as a result over that period.
The opposite is now occurring.
The Aussie dollar, assisted by their sovereign AAA credit rating has been a major beneficiary of funds exiting the Euro over recent weeks.
The change in heart towards the NZ dollar by the international investment community cannot be attributed to one factor and as always it is a combination of variables that has turned the sentiment and direction negative for the Kiwi:
- The price of our largest export commodity, wholemilk powder has collapsed since March, confirming how dependent the economy is on dairy and volatile demand gyrations of the Chinese buyers. The price reductions have removed over $4 billion of export receipts from the economy over the next 12 months compared to the last 12 months. The downturn in Australian mining/resources occurred much earlier and has stabilised over the last six months.
- The RBNZ altered their message substantially from the early June monetary policy statement to the late July OCR review date where they put interest rate increase on “pause” and jawboned the currency down far more effectively. The threat of central bank intervention in a minor currency is sometimes an invitation to hedge funds to speculate against that central bank. However, on this occasion the overlay of tumbling dairy prices and the proximity of the general election on 20 September dissuaded the FX traders to play with the Kiwi dollar.
- Political risk has not been a major influencing factor on the Kiwi dollar since the fundamental shifts in monetary and fiscal policy in the late 1980’s/early 1990’s. Despite expectations by us in the financial markets that the new Labour Government in 1999 would dial back the earlier free-market reforms, they did not do so and Finance Minister Michael Cullen maintained the integrity of the policies and the economy prospered.
The current lack of investor interest in the Kiwi dollar is partly due to the risk (albeit a reasonably low risk) of a Labour/Greens coalition government being formed in 12 days that would fundamentally change the independence and operating objectives of the RBNZ. Most would see the NZ dollar depreciating on such an outcome and overseas investors pull their money. An alternative messy election night result of NZ First Party leader Winston Peters holding the cards as to who he might (or might not) form a government with would also be destabilising for the currency markets.
A clear-cut victory for the National Party to govern alone or with the support of Maori, Act and the Conservatives would be seen as NZ dollar positive.
- The carry-trade investors who came into the NZ dollar at 0.8500 and 0.8600 after the June RBNZ monetary policy statement were expected to bail-out of the Kiwi on a break below the 200-day moving average at 0.8450. The disinvestment related selling has transpired as anticipated with the Kiwi falling rapidly from 0.8450 to below 0.8300 last week.
The forecast and outlook for the NZD/USD remains for further weakness to 0.8000 due to the stronger USD value globally and the factors listed above continuing to attract NZD sellers over buyers.
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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