By Roger J Kerr
Global foreign exchange markets this week will be focussed on employment numbers being released in NZ. Australia and the US, as well as all important manufacturing indices in both China and the US.
Growing tightness in the local labour market, despite the strong inflow of foreign workers, will be a reminder to the financial markets here that eventually wage increases will follow and the implications for future inflation are clear.
The NZ interest rate market appears to have temporarily forgotten these “cause and effect” relationships as they price virtually no interest rate increases over the next 12 months.
Australian employment figures could be anything as there is currently no trust in their statistical measuring systems. Strong earnings growth by listed US companies suggests continuing strong jobs growth in the US economy.
Financial and investment markets have been seemingly surprised at the further massive injection of monetary stimulus by the Japanese last Friday.
The Japanese authorities were always likely to add to their monetary expansion when there were signs emerging that the original initiatives were not having much impact on consumer spending and GDP growth.
Increasing sales taxes on consumer goods would not have helped consumer sentiment.
The net result is a sharply weaker Yen currency value to 112.50 and a stronger US dollar across the board. The USD Currency Index has lifted by over 2% to 87.00 from the 85.00 area over recent days.
By contrast the NZD/USD exchange rate is only down 1.2% from 0.7850 to 0.7770, again the Kiwi dollar displaying some resilience in the face of general USD strength.
The NZ employment data this week is more likely to be supportive of the Kiwi as employment growth confirms how much better the NZ economy is going at this time compared to others.
The major theme for the NZ dollar direction continues to be higher against the Yen, Euro and Pound, stable against the AUD and stable to marginally weaker against the appreciating USD.
RBNZ projections for the TWI Index do not indicate a major NZ dollar depreciation from here, despite their repeated rhetoric of unsustainably and unjustifiably high exchange rate levels.
Unlike the local interest rate markets who are now virtually pricing no inflation next year for the NZ economy, the FX markets in holding the NZD/USD rate in the newly established range of 0.7700 to 0.8000 are telling us that NZ will still be a reasonably attractive destination for global funds as our interest rates remain 4% above alternatives.
An outlook for the Kiwi dollar in the broad 0.7500 to 0.8000 trading range over the next 12 months is generally above the current consensus forecasts of local and global banks who are predicting the low 0.7000’s (some considerably lower).
To some degree the lower NZD/USD forecasts are based on a lower AUD against the USD as China slows and metals/mining commodity prices do not recover.
I would not be so sure about the slowing up of the Chinese economy as the major rationale behind these currency forecasts. I heard two Australian-based economic forecasters at a conference in Sydney last week both espousing doom and gloom for the global economy i.e. the Japanese deflation/no growth syndrome for the rest of the world for the next 10 years.
My reading of their identical views is that because the Aussie economy is going through an unprecedented rough patch currently, all Aussie economic commentators are automatically doom-merchants on the whole world.
These guys need to spend some time across the Tasman to see how a nimble, adaptable and competitive economy works.
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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