By Roger J Kerr
The NZ dollar has consolidated its gains against the USD in the 0.7200 to 0.7300 trading range over the last two weeks.
There has not been any sufficiently negative news to deter the buyers and holders of Kiwi dollars.
Whilst the GDP growth outcome for the March quarter at +0.50% was less than consensus and RBNZ forecasts, the forward outlook for economic expansion remains extremely positive with both consumer and business confidence surveys returning to high levels.
Confidence and optimism stemming from the ingenuity, inventiveness and true sporting grit displayed by our Kiwi yacht race guys in the America’s Cup can only boost that positive economic momentum.
A nation’s currency value can be likened to a share price on its economy and right now with the New Zealand economy performing so well it is difficult to see what would cause a sustainable depreciation of the NZ dollar.
However, foreign exchange markets are always looking six to 12 months forward as to the likely future economic conditions and performance.
Therefore, historical GDP and other economic measures may not be reliable indicators as to future NZD/USD direction as future expected conditions may not be the same as the past.
It also must be remembered that New Zealand’s economic health and direction is only one side of the two sided equation that makes up the NZD/USD exchange rate.
How the US dollar itself is moving in global forex markets against all currencies determines the NZD/USD direction as well.
Right now the USD is marooned at $1.1200 against the Euro with the international financial and investment markets remaining very unsure as to whether the Federal Reserve (projecting four 0.25% interest rate increases over the next 12 months) will be correct, or will the US short-term interest rate markets be correct with their forward pricing (projecting just one 0.25% interest rate increase).
Much depends on the trend of US inflation from here. If the US’s inflation and economic data supports the Fed’s outlook over coming weeks/months, then the US dollar should recover and appreciate back to below $1.10000 against the Euro. A stronger USD on the world stage will pull the NZD/USD back towards 0.7000.
Over coming months two potential risks that may prove to be negative for the Kiwi dollar in its own right will come into the focus of the FX markets:-
- Three months ago the Trump administration announced a three month study/investigation as to what imported products into the US from what countries were replacing US manufacturing jobs. The results of that investigation are due very soon and it is likely that new US import tariffs and trade protectionism will be the recommended solution. If the new trade barriers extend to agriculture products, then the NZ dollar will be sold down by the markets, just as it was in early May when President Trump tweeted that dairy products could be added to tariffs imposed on Canadian lumber coming across the border into the US.
- Political risks on the NZ economy and NZ dollar exchange rate are set to increase over the next three months in the run up to the late September General Election. From an offshore investor and currency speculator’s perspective the prospect of a potential change of Government to a more left-leaning Labour/Greens coalition would appear very strange to them given how well the economy is travelling. The NZ voting public rejecting the economic and employment growth for some other objectives would cause those overseas investors into NZ shares and bonds to reduce their holdings (thus become sellers of the NZ dollar in doing so). It does appear that the election campaign will be fought over immigration, housing and environmental issues (not financial/economic issues), therefore the incumbent National Government faces a real challenge to be re-elected for a record fourth term. Typically, political risk in New Zealand is not rated by overseas players as that influential for the currency. However, the prospect of a hung Parliament with NZ First’s leader Winston Peters calling the shots as to whom he will support to form a new Government would have to be unsettling for any foreign investor in the Kiwi dollar.
Political opinion polls will be as important as inflation, GDP growth and export commodity prices as a lead indicator and direction driver for the Kiwi dollar over the coming period.
Roger J Kerr contracts to PwC in the treasury advisory area. 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