By Roger J Kerr
The downward momentum of the Kiwi dollar continues, once again confirming the old adage and pattern that the NZ dollar goes up the escalator in a stepped fashion however goes straight down the elevator shaft when it falls.
The shifting sands of sentiment in global foreign exchange markets have certainly turned against the Kiwi dollar for the very good reasons that have been articulated in this column over recent months:-
- The rapid decreases in the price of our major export commodity, wholemilk powder.
- The RBNZ moving to an “on hold” monetary policy stance, removing a Kiwi dollar positive.
- A stronger US dollar on global FX markets as these markets start to price-in the prospect of increasing US interest rates in 2015.
- A substantial weakening of the Euro due to additional monetary policy stimulus by the ECB, Ukraine geo-political risks and weaker German economic data.
- A sudden turn-around in the fortunes of the Australian dollar against the US, the A$ depreciating sharply from 0.9350 to 0.9000 over the last two weeks. Falling gold and hard commodity prices, partly due to the stronger US dollar, have contributed to the recent AUD selling.
- It was always assumed that the political risk on the NZ dollar would increase if the opinion polls closed-up closer to the 20 September general election. It is impossible to measure how much of the recent NZ dollar selling has been due to offshore investors reducing their NZ exposure as the see risk of significant economic policy changes under a potential change to a centre-left Labour/Greens government. The sheer uncertainty of what an MMP electoral system can throw up with minority political parties calling the shots are certainly influencing investor risk decisions for the meantime.
In the very short term, how much further the NZD/USD exchange rate falls below 0.8100 will be determined by the election night result as well as FX market reaction to the Federal Reserve FOMC meeting on Thursday 18 September and NZ GDP growth data for the June quarter on the same day.
After depreciating seven cents from 0.8800 without a significant rebound, the Kiwi dollar might be overdue for a consolidation period and minor upward correction.
That will only come about if the election result is a clear-cut victory for the incumbent National Government and the Federal Reserve disappoint US dollar bulls.
Judging how the foreign exchange markets will react to an election outcome that is potentially far from clear in terms of economic policy direction is fraught with difficulty, however likely scenarios and outcomes are as follows:-
- Clear-cut National centre-right coalition win = NZ dollar up.
- NZ First leader Winston Peters holding the balance and horse-trading economic policies = NZ dollar initially down; however back up if he “supports” a National centre-right government.
- Labour/Greens centre-left victory = NZ dollar sharply lower as overseas investors vote with their feet and exit New Zealand on fundamental changes to monetary and fiscal policy settings.
Looking further ahead into mid-2015, the NZ dollar should find greater support against a stronger USD globally as NZ interest rates still need to increase another 1% to return the OCR to the new normal of 4.5%.
Longer term demand/supply equations for wholemilk powder do not suggest continuing plunging prices once the current supply overhang in Chinese warehouses is rectified.
New Zealand’s medium to long term economic fundamentals remain very sound and superior to many other OECD economies, it is not a recipe for massive currency devaluation below the 0.7600 to 0.8000 region.
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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