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
6 Comments
Agree....funny isnt it.
Of course if a left Govn looks like its going to create opportunities for sane investors (ie not the rabid right wing, far right politically minded nut job speculators/parasites) the NZD might actually not drop much.
Also the fact that the RB is no longer rising making the carry trade less profitable should be an indicator that dropping the OCR could help a lot.
Swings and roundabouts in bucket loads.
regards
The same thought has occurred to me. Even highly leveraged property investors who are doing so for rental returns will likely do better under a Labour led government. Only those purely in it for capital gains may suffer, along with overseas investors who see the value of their investments drop in their currencies.
All the trading industries should benefit.
The article also debunks the myth put out by Bill English that governments can have no effect on the exchange rate. Very clearly they can. National though has been running a populist government where, while they probably know how damaging their policies are, they understand that Joe Voter likes rising property prices and cheap overseas holidays, future be damned.
That's one view. This is my view. Been waiting for this for a while.
Last night Alan Kohler, (business spectator and commentator extraordinaire), made the obvious comment:- US FED monetary policies over 5 years have resulted in the FED balance sheet expanding by $3 trillion, with one purpose, raising asset prices, particularly the DJ and S&P which are at records. Conditions are now right to cease. The FED has increased its balance sheet from $1½ trillion to $4½ trillion. The question is, how does it now get out of the corner it has painted itself into? Answer? Very slowly. NY has to go down. USD up. AUD down. NZD down
The smart money is moving now
The smart money is moving now
Cetainly is, and a refined understanding of what constitutes high quality collateral will be paramount for those with no choice but to be invested.
JPM notes;
"we anticipate that the start of US rate hikes will do damage to markets in the short term" although only early on, because obviously that's when the PPT will kick in, or as JPM puts it "there will be greater differentiation over a more medium term between liquid and less liquid assets."
That's the good cop.
Here is bad cop again: "In the short term, investors sell what they can, making liquid assets more vulnerable."
And since no bank can end on a dour tone, here, to conclude, is good cop: "But over a matter of months, we think liquid risk assets, such as equities, will fare better than less liquid credit, adjusted for their normal volatility."
Translated: JPM will be selling "more liquid" stocks to "investors", while buying less liquidity debt. After all, remember: the Fed's definition of "high quality collateral" is, debt. Not equity.
And it is precisely debt that all the banks are desperately trying to load up on as they sell every last stock in their possession to what little is left of the retail investor as possible. Read more
Near term risks involve the timing of standing aside from the pressure of hedges lifted while early risk-off traders seek the exits for higher risk assets;
There was important confirmation of my analytical thesis back in the spring of 2013. The so-called “taper tantrum” saw the emerging markets (EM) under heavy selling pressure. Global (highly correlated) risk asset prices began to falter. Importantly, in the face of heightened risk aversion, Treasury yields moved higher. This was problematic for many popular leveraged strategies that incorporate “safe haven” Treasuries as a hedge against other risk asset classes (equities, corporate debt, EM and commodities). Read more
This from Chris Weston today:
"If you want to know where AUD/USD is headed, traders need to look at implied volatility and US bond yields. This is the same with emerging markets, developed markets, corporate credit and fixed income. And one thing is consistent – the perception of change in the language of the Federal Reserve, which in turn has caused a move higher in yields. Mix this with higher volatility and could see emerging markets underperform and carry structures unwound."
Yes there is obvious evidence the smart money is moving now. If Janet doesn't deliver on the dialog just yet, it may turn out to be the early money. Better to be on the early train than the late one.
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