By Roger J Kerr
The NZD/USD exchange rate starts the new week at the same level it commenced trading the previous week, at 0.6480. However, the apparent stability belies a fairly wild week where it hit a low of 0.6350 following the CPI inflation result on Wednesday 20 January and reached a high of 0.6550 last Thursday.
The surprisingly large decrease of 0.50% in NZ consumer prices for the December quarter immediately raised calls for further RBNZ interest rate cuts. However, the lack of follow through selling of the Kiwi dollar below the previous low of 0.6260 in September last year indicated that there is not a lot of speculative interest in the NZ dollar from offshore parties currently.
Moreover, the RBNZ will be “looking through” the short-term reductions in food and fuel prices that caused the deflation in the final quarter of 2015. The RBNZ’s own core inflation measure for annual inflation once those volatile food and energy prices are stripped out (“Sectoral Factor Model”) actually increased to 1.6% pa and has increased in each of the last four quarters.
In the end, the FX markets concluded that the RBNZ is unlikely to cut interest rates again just after their December statement in which they all but confirmed that OCR cuts had come to an end. On top of that, the economy is bubbling along at a 4.00% annual GDP growth over the last six months with capacity constraints emerging and earlier currency depreciation about to increase tradable inflation considerably over coming months.
Therefore, the RBNZ’s OCR review statement this Thursday will mention recent global investment market volatility, however be blandly balanced in respect to the outlook for the NZ economy. The RBNZ should conclude like the US Federal Reserve has also concluded, artificially low energy and commodity prices at this time are transitory and should not alter the current monetary policy course in respect to medium term inflation control.
The recovery in the AUD against the USD from lows of 0.6850 mid last week to back above 0.7000 has pulled the Kiwi off its lows, albeit the NZD/AUD cross-rate has dropped from 0.9400 top 0.9260 with the CPI result causing independent NZ dollar weakness. It is instructive that the Aussie dollar has weathered the recent storm of collapsing metal/mining commodity and oil prices rather well with only very minor depreciation in the currency value against the weak commodity prices.
It would not be too surprising to see international investment players contemplate counter-cyclical buying of Australian assets and the AUD as they anticipate the recent safe-haven capital flows into the Yen and Euro reversing out and looking for a home with more upside than what Japan and Europe offer. Like New Zealand, Australia’s interest rates are going no lower and the currency has experienced major depreciation over recent years. Outside of the very low prices for resources, the Aussie economy is performing better than most with positive employment growth of late. The sheer volumes of mining tonnages now being shifted following the mining investment boom a few years back is a major positive for their GDP growth.
As expected, the equity market turmoil in the first few week of January looks like it has quickly settled. Weak Chinese economic data that could derail the global economy was again cited as the major cause of the market sell-off. However, everyone knows that equity market values have been overstretched in recent years on the zero cost of money, therefore a 10% to 20% sharemarket correction was always going to happen at some point. The Chinese data was just a convenient catalyst to have a reason to sell, identical to the volatility/uncertainties of last August/September.
To steady the western investment ship, the Chinese authorities have had to stress again that they are transitioning their economy from over-reliance on intensive infrastructure capital investment to consumer spending. It is a long journey to do that and the road will have a few bumps along the way. Thank god the Chinese have the fiscal and monetary firepower to again settle investor sentiment down and reduce the threat to global growth.
It appears to me that the NZ dollar has also weathered the storm of lower dairy prices, lower equity markets and pandemonium in oil markets rather well over recent weeks. Our forecast of the Kiwi dollar broadly holding in the mid 0.6000’s made seven months ago has been accurate to date and still should hold going forward over coming months.
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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