Kiwi dollar up despite all the bad news

Currencies

Roger J Kerr says markets pricing in all expected news, suggesting that they see no more significant downside from dairy

11th Aug 15, 8:57am by Roger J Kerr

By Roger J Kerr

Price action in the NZ dollar foreign exchange market over this last week has been very instructive as to current market conditions and the likely future direction.

How much more bad economic news can the Kiwi dollar absorb and still not be sold lower is the question that springs to mind?

Despite wholemilk powder prices plunging to levels lower than even the bearish futures market had anticipated and Fonterra slashing their dairy payout forecast to $3.85/kg milksolids, the NZD/USD exchange rate ended the week above 0.6600, higher than where it started the week. The failure of the NZ dollar to depreciate on all this bad news just confirms how much the FX markets had already built in such outcomes beforehand.

It can be of no great surprise that the currency markets price-in the future so heavily all the time. The very nature of FX markets means that all that is known and anticipated today is built into today’s FX market rates.

The exchange rate only normally reacts violently with large price adjustments when the news is a surprise and totally unexpected. Buyers and sellers of the currency hurriedly adjust their positions/hedging strategy in such circumstances.

My reading and interpretation of the NZ dollar movements over the last four weeks (as opined in this column) is that the depreciation from 0.7500 to 0.6500 was a reaction to plummeting dairy prices. However, all that bad news for the NZ economy was already priced-in to the exchange rate at 0.6500 and fresh new NZD selling was waning in intensity and volume as a result.

While some economic/currency forecasters are still banging on about the fall in the Terms of Trade Index and Balance of Payments Current A/c deficit as new factors that will send the NZ dollar lower to below 0.6000, the FX market see this as stale news and are consequently not pricing the currency lower at this time.

It is a simple argument to state that if the NZ dollar was going to be sold lower due to all the negative economic news over the last two months, it would have already depreciated to 0.6000.

The fact that it has stabilised around 0.6500/0.6600 for a good few weeks now tells us that the sellers are exhausted and short NZD position holders are starting to unwind (i.e. buy back their Kiwi dollars) as the downtrend runs out of steam.

It may still be too early to call the ultimate bottom in the NZD/USD exchange rate as there are other influencing and important variables outside of dairy prices that are less certain as to outlook. While there can be some confidence that dairy prices cannot go much lower and the dairy demand/supply equation will re-balance and cause a recovery in prices within a few months, there is still much debate as to whether the recent monetary and fiscal stimulus packages in China will be sufficient to stabilise and lift metal and mining prices that are so crucial to the Australian dollar’s value.

The Reserve Bank of Australia’s moderation in wording last week in respect to the AUD currency is encouraging to the view that the AUD may have depreciated enough.

Globally we are seeing supply side responses to very low metal and mining commodity prices (aluminium smelters and coal mines closing) and the same responses can be expected from US and European milk powder suppliers. One of the five or six variables that caused the perfect storm for plunging wholemilk powder prices was low grain feed prices/costs in the US and Euroland allowing those milk producers to accept a lower selling price.

More recent price movement back upwards in grain (in Europe) suggests that the future supply and inventory volumes are less than expected. Wholemilk powder prices should eventually follow as the chart below against Maize futures (in Euro’s) prices shows.

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Source: RBNZ

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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

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32 Comments

by sadr001 | 11th Aug 15, 9:31am 1439242304

Interesting, this would imply that if the RBNZ cuts less than expected or doesn't cut the OCR then our dollar would shoot upwards?

by workingman | 11th Aug 15, 10:23am 1439245399

No more significant downside from dairy?

Really? Maybe it’s time we looked with a little more focus. Beyond the currency markets.

Fonterra’s predicament and the dairying collapse are the direct result of successive governments’ devotion to seeking what has seemed easy money.

New Zealand has been fortunate in its land availability and its freshwater resources. Agriculture, horticulture, of some sorts, are natural and intelligent choices. There are, however, a range of choices in the both. And New Zealand policy has been consistently to choose the easy options.
Invariably the easiest route, the chosen route, is to encourage and attempt to exploit easily produced, relatively unimproved product. Usually, if there is value to add, someone else adds it.

And because of the same economic short-sightedness, the health of both these resources – soils and water - are now severely compromised and will continue to degrade, at an accelerating pace, for decades to come.

It is also certainly strange that this overarching enthusiasm for commodity products should go together with so little understanding of commodity markets. Government ministers show plainly they have not the least conception of these sectors. Fonterra apparently has little more. ANZ chief economist Cameron Bagrie is quoted (Stuff/NZ Farmer, 11th August) as saying "I guess one of the lessons here, particularly when you are in the commodity game or business, is you've got to learn to live with volatility."

Presumably there’s more to his role than guesswork, but volatility is basic to commodities. What volatility means – if it needs spelling out – is that the producer has little or no influence over pricing.

When the price skyrockets, people congratulate themselves; when it collapses (as invariably it will), the same people have nothing but hurried improvisation to offer. They were never, whatever the powerpoints suggested, in a position of influence over their market, their pricing, even their customer choices. They were simply being carried on a tide, and when the tide drains away, they’re sitting on the mud.

The banks of course do pretty well out of it, both on the way up and on the way down. Some measure of volatility is essential to functioning financial markets. But this brings us to debt. New Zealand's dairy debt has trebled to $34.5bn, from $11.3bn in 2003 (thanks to Stuff/NZ Farmer again).

At this level of industry and financial exposure, people start talking about ‘too big to fail’. When anyone starts talking about ‘too big to fail’ particularly in the commodity sector, this is very dangerous short-sightedness.

If New Zealand wants to be trapped in a relatively low value, highly volatile economy, together with a radically poisoned environment, then sure, treat dairy farming, as it’s currently structured, managed and producing, as ‘too big to fail’.

Downside? There’s plenty of it.

by DFTBA | 11th Aug 15, 10:51am 1439247113

"And New Zealand policy has been consistently to choose the easy options.
Invariably the easiest route, the chosen route, is to encourage and attempt to exploit easily produced, relatively unimproved product. Usually, if there is value to add, someone else adds it. "
.
.
Hear, hear.
Instead of exporting raw materials, we need to grow a culture and economy of artisans, of highly skilled trades people, who will make value added products.
We already have a few (we have a few successful natural skin product companies who are doing quite well), but there is so much scope for more.
This will create jobs, whole industries, even. It can be done (will need to be done) in the regions, so they will get a boost, too.
And because a lot of these new products, will - hopefully - trade on our clean, green image, it will encourage a higher level of guardianship of our natural resources, our environment, our habitat.

by Learn to Socia… | 11th Aug 15, 12:18pm 1439252280

Our local boutique, organic dairy farmer is selling cream for $17 per litre. People drive for kilometres to buy it from his front gate. I understand that Fonterra pays about 12 cents to its farmers for a litre of cream. That is the entire dire situation in as nutshell.

Green Clean food grown organicly in New Zealand is life saving and life promoting. We MUST realize that we are capable of enhancing humanities health (food as medicine) with our food! NOT providing cheap industrial swill to Maccers, BK, Pizza Hut etc to make milkshakes etc that is killing and maiming millions.

If we turned NZ into a giant Farmers Market, with ultrafast broadband, great artists/musicians, decriminalised marijuana, bicycle tracks, sport, skiing.... all the things we are great at and known for- we would be setting in place a happy, healthy and prosperous future for our kids and grand kids

"Saturated Fat Helps Avoid Diabetes"
http://articles.mercola.com/sites/articles/archive/2015/08/10/saturated…

by Don m | 11th Aug 15, 12:36pm 1439253363

Great attempt at satire LTS..well done
unfortunately many on here will think you are serious..

by Learn to Socia… | 11th Aug 15, 1:23pm 1439256235

Hi Don M
I am completely serious. You see, I am old and restless. I have been able to visit boutique, high tech, prosperous, healthy places like Seattle, Iceland, Norway, Finland etc. Someday you might explore the world, and your eyes may open? There is more out there than just Disneyland and the Gold Coast!

by Don m | 11th Aug 15, 1:36pm 1439256991

ok I see your point..in your utopia the unemployed could get stoned,sit in the street listening to buskers and watching mimes,and then message all their mates on facebook..on how cool it is..groovey

by DFTBA | 11th Aug 15, 1:55pm 1439258103

Do you have any meaningful retorts, based on some facts?
Or are you sticking with the (not so value added) sarcasm?

by Anarkist | 11th Aug 15, 2:12pm 1439259148

So what? What's it to you, what myself or anyone else chooses to do with their lives? Funny how capitalist apologists like yourselves pontificate about freedom and liberty, but once discussions turns to matters related to work, it readily becomes apparent the only "freedom" and "liberty" which you lot deem acceptable is conditional upon us doing the kind of things you wish us to do. Sell our labour at the lowest possible price to those with capital.

by Don m | 11th Aug 15, 3:15pm 1439262946

??? Anakaist.. Not sure what that rant was in aid of..I honestly thought LTS was taking the piss..i mean have you read his ideas for avoiding the impending problems??
..smoking dope..ever wondered why northland forestry workers have more accidents than the norm?
..he says that farmers receive 12c/litre for cream...more like 1$ (3.5% of 13%MS)
..those who live on organic food don't live any longer ...it just seems like it..
many on this site bitch about the price of dairy products..imagine the wailing if they all had to buy organic..
.."A farmers market eh?"..just wait til health&safety,NAIT,regional councils ,and a plethora of bureaucrats get involved and see how profitable it all is

..
No- where do I tell anyone how to live their life...do what you like...just don't expect me to pay for it

by steven | 11th Aug 15, 3:23pm 1439263389

I buy organic milk, if nothing else it seems to last a damn sight longer in the fridge.

by cowboy | 11th Aug 15, 3:30pm 1439263843

Well it should have been outside the cow for less, and it won't have been so heavily processed which can damage the cell structures inside the milk.

by steven | 11th Aug 15, 3:25pm 1439263545

He didnt say smoke dope, he said make it no longer illegal.

by cowboy | 11th Aug 15, 3:28pm 1439263720

It is a bit of a concern. just what level of society can give personal freedoms.
If it's possible should we have folks just enjoying the groove and free to eat - how does that really any different from clergy to some religions? or people promotion useless education or reports?

What level of labour is society _owed_ by the non-violent? some communities have monks sitting in prayer, or mothers who only look after their own offspring.

Should those who create things be rewarded? what is creating a song or a book actually worth on a per hour basis?

Is it ethical to take a worker and slice their life into hours and demand those be counted for and sold (IMO no). vs someone like the fourth estate, of work once, print&profit many - of even profit from adverts...

What about those who develop systems and synergies, how much wealth and power should they me permitted?

Not "lowest price with capital"... because then we would have our human capital to provide for ourselves... "lowest price for those with political clout" because they control what we can work on and steal what they want from the profits. In the dark ages a serf had to work 1 day in seven on his masters estate... 14% taxation, and 10% tithe to church to cover charity (no tax on the gentry/company). yet the system can't work on that today

by Value Added | 11th Aug 15, 2:23pm 1439259821

So you think there' s no marijuana in New Zealand now? He/she is talking about tourism and it's not a bad idea. It'd surely be better than this boring conservative backwater.

Personally I think NZ should be a creative industries/IT service/software app developer/server host base for the world - but we'd need Sam Morgan's cable from the states. And a better government...

by cowboy | 11th Aug 15, 3:17pm 1439263042

hey - trying y'know.
putting something together in Palmy North. Not like I've got much income to work with, and I've still got rates and taxes to pay......

Not like I can just walk out of a major tech company and spawn a niche product in NZ... gods just our tech prices alone for hardware is a mission, let alone getting the money to pay the lawyers for the operational paperwork - AND one of the university courses I want is *only* offered by Massey to it's _Albany_ internal students.

by DFTBA | 11th Aug 15, 12:48pm 1439254113

Yep, all good ideas.
We have so much more to cram into our social calendar...get more musicans over, more festivals, more sport events (and NOT just rugby).
Because NZ is so far away from most other places, people come over and tack on a holiday, too.
Sporting events are a major - so many people organise their life around their sport, and chase events throughout the year.

by Learn to Socia… | 11th Aug 15, 1:30pm 1439256635

I agree totally. If you want to see massive amounts of money being joyfully exchanged, just go to a big (any) sporting event, concert, farmers market, or festival. Why have we got this attraction to the sleazy (gambling, commodities) side of life?

by moa man | 11th Aug 15, 2:24pm 1439259842

Markets in commodities,fx etc need a price setting mechanism, that is why we have them.
No different than a farmers market, where stall holder A, see's stall holder B, selling the the same item at a lower price, and stallholder B thus getting all the customers.

It is the same thing, just a different scale.
Something has to define the market price, in whatever market.

by cowboy | 11th Aug 15, 3:20pm 1439263259

got all that money to spend on festivals and concerts and show days.

don't have a lot of sympathies for those peoples' money issues.

by DFTBA | 11th Aug 15, 3:37pm 1439264267

Well, looks like that's what the millennials are spending their money on....music, 'experiences'....and there is a lot of sport tourism.
from full on triathlons, to marathons, to yoga retreats and everything inbetween.
Don't just judge the word by how you see it and experience it....
There's plenty of money out there, we just need to convince people to come spend it here.
And now that tourism is our #1 industry, we may as well get busy developing the side industries (tourists love 'locally' made stuff..)
.
but yes, a big part of the future is IT and software, apps...so people should learn how to code.... They should teach that stuff in primary school.
.

by cowboy | 11th Aug 15, 1:26pm 1439256385

To create such things in the regions we need decent excess-riskable disposable income, and access to up-to-date skills, and not be be constantly chasing paperwork/elf'n'safely.

...see the problem

by DFTBA | 11th Aug 15, 1:52pm 1439257963

Maybe.
Old skills can be just as valuable as new, up to date ones.
.
For example, those skin companies I mentioned are using very old 'remedies' and recipes. And extracting active ingredients from plants has not changed all that much, over the years.
.
What about a tanning industry? We slaughter enough animals....what's happening with all those hides? Why aren't WE turning them into boots and gloves and bags and shoes?
.
There's a whole raft of industries we could help to promote, which we could export to the rest of the world.
Ban roundup, and get a bee-boom going
our manuka honey is worth its weight in gold (if not more, these days).
A lot of our native plants have been shown to have healing properties, so our native bush could be protected and cultivated.
It will all require buy-in from the business world, investors, banks, the government (an enlightened one next time, please), and a work force which is committed to grow with the business.
All not insurmountable things, I'd say?
.
I don't agree with lowering the standards for Health and Safety, but yes,the paperwork needs to be made easier, more navigable, and duplication or triplication removed.
.

by cowboy | 11th Aug 15, 3:55pm 1439265343

We don't have a market for the end product, and the price of labour and regulation was too high. Just check into the history of the companies.

We do have hide and tanners but they're unpopular media places because they smell really bad. Also machinery and chemical technology has accelerated the processes. Then there's groups like PETA that help disable some markets.

Yes manuka honey is worth a fortune. getting the volume to make getting the facilties and licenses worth getting is problematic. I know a couple of dairy farmers that are growing their dairy business by the support of their beekeeping activities. But commercial licensing would put them out of business, and there's a lot of competition for good spots.

the standards for health and safety many have got out of hand with risk and cost.

If one wished to start a commerical bee operation then one needs to develop for ones area, transport cost, and premises. OSH, MBIE would come in and say you need all the bells and whistles to do this, and since there is only small production - the business is dead.
Or you could go all out like Georgie Pie, borrow to the max, expand volume, and like todays dairy farms, find yourself unable to pay the bank manager and the business is dead.

Even once the small business was working (say your parents died) you upgraded everything to new and shiny. You need to grow...so you have to walk away from that investment and start again.

Do you do a Pumpkin Patch or a Postie Plus, take on a huge IPO, just to get more stores...and find your model isn't scalable (staff issues). Or perhaps you go to aussi like the Warehourse, or KMart into NZ. perhaps we're getting ahead of ourselves....

...so we take on extra staff in NZ, we have more hives, extra transport costs, new premises to fit out, extra staff to hire, more paperwork, and big market to develop.
In the meantime the New Zealand government is taking 30% of every dollar profit, and 15% on every dollar paid in wages or interest. (and 20-30% out of every dollar our staff receive). + ACC + levies + certification.

Just what kind of margin & net profit are we going to need to repay those NZ priced capital outlays?
low cost is ok if your company inherited it's core business, or if much of the business is low capital (eg writing reports, shuffling people and policy files)

tradespeople get buy because they have moderately low capital out lay.
Housing rent works because low staff numbers.
Eateries in NZ work because the wages paid to staff are s...really bad.
Supermarkets get by on volume.
software and niche electronics because their overheads are low.

Government know this and think the answer is to make NZ into a UK or Singapore population to solve all those problems.

things like health and Safty, where thousands of dollars of useless scaffolding are added to every low risk job, certifications for every plumbing job. extra costs on all building work. Expensive official cones and striped barriers for all electrical jobs which all take time away from the job.

just finsihed flicking through Australian Dairy annual report supplied by someone here. What did that document cost to produce? What items in it had any value? what decisions did it influence?
What was the ROI _revenue_ from it?

by notaneconomist | 11th Aug 15, 3:57pm 1439265455

Old skills are being resurrected around the world DFTBA but those old skills don't come with a piece of paper from an education provider and so are on the main not recognised by the bureaucrats who then make sure that those people and those business ideas that you have stated above and others that are similar do not see the light of day or are so severely restricted that good growth is unable to be achieved !!

People who have learned those old skills end up making what they can, when they can in a very small way and their market is mainly local.....some break through to the bigger market place but it is at enormous personal expense and often these people are in debt to the eyeballs.....

If people in the bureaucracy could only get their head around the fact that there is room for everybody rather than the one glove fits all approach then we would have the diversity.....even in your posting you want certain things protected (native bush and Health and safety) as soon as you protect something you are stopping something else!! And when you place restrictions via protective measures you are going to either stifle the market or swamp the market (the dairy industry is a great example of this) as everyone is forced to work in the bounds of the restrictions which stumps creativity and encourages over-investment in other areas.

Health and Safety is stupid !!! It is the most pathetic concept yet that was ever been dreamed up by a bunch of bureaucrats......it has nothing to do with education and safety and everything to do with laying blame and litigation!! We live in a victim world and everyone wants to point a finger.....and everyone's trying to make sure the finger is not pointing at them......IF health and safety actually worked then we wouldn't be having so many accidents.....the numbers who work in this industry would be reduced significantly.......and we would be somewhat more smarter than we are now.......the fact is some people panic when the need to be calm, some people freeze when they need to move, some people think they can out smart gravity, while others don't know what gravity is, some people have eyes on their head that don't see, others see but have no bloomin idea of what is likely to happen. some people hope she'll be alright, while others ensure that it will be alright........and your telling me that health and safety is capable of knowing what another persons head and heart are thinking !!!

by frazz | 11th Aug 15, 8:27pm 1439281650

I think some Forestry workers would disagree with you....as they are still alive today.

by cowboy | 11th Aug 15, 10:32pm 1439289127

why did they choose to work dangerously in the first place?

by meh | 11th Aug 15, 6:31pm 1439274677

"Fonterra’s predicament and the dairying collapse are the direct result of successive governments’ devotion to seeking what has seemed easy money"

"And because of the same economic short-sightedness, the health of both these resources – soils and water - are now severely compromised and will continue to degrade, at an accelerating pace, for decades to come."

Easy to blame the government. Who put them there? The global predicament and economic collapse are the direct result of mankind's devotion to money.

"There are some things in the world we can't change - gravity, entropy, the speed of light, and our biological nature that requires clean air, clean water, clean soil, clean energy and biodiversity for our health and wellbeing. Protection the biosphere should be our highest priority or else we sicken and die. Other things like capitalism, free enterprise, the economy, currency, the market, are not forces of nature, we invented them. They are not immutable and we can change them. It makes no sense to elevate economics above the biosphere." - David Suzuki

by bender | 11th Aug 15, 11:57am 1439251041

But, but that would require some govt creative thinking and (shock, horror) action and planning. Not on this watch DFTBA.

by DFTBA | 11th Aug 15, 12:45pm 1439253938

No, bender, it requires an electorate with some creative thinking, guts, and patience.

by Hamish | 11th Aug 15, 2:16pm 1439259410

Unfortunately developing these types of industries take more time than your 3 year election cycle. And the masses are addicted to quick fixes and hand me ups that the political parties are incentivised to support. Plus you have the big players in any industry defending their monopoly positions with complicity of the government of the day, let alone TPPA around the corner to keep strangling the little guys and innovators...

by DFTBA | 11th Aug 15, 3:41pm 1439264488

Yes, agree, it takes more than 3 years.
But we can try.
And that's why I asked for an electorate with patience....and guts....I know it's a lot to ask.