Roger J Kerr says for an export/import economy like New Zealand relying on free global trading conditions, the recent development toward outright trade wars is very bad news indeed

By Roger J Kerr

There were plenty of reasons why the NZ dollar should have been sold lower in the foreign exchange markets last week.

The fact that the Kiwi, for the most part, has remained above 0.7200 against the USD is testimony to the lack of international interest in our currency now that there is no interest rate return advantage in buying and holding the currency.

However, the Kiwi’s stability above 0.7200 may not be too long lasting as it has rather surprisingly outperformed the AUD against the USD, forcing the NZD/AUD cross-rate back up to 0.9400.

There is no justification for the Kiwi dollar gains against the AUD at this time; both interest rate and commodity price differentials suggest a lower cross-rate.

The speculative fraternity are likely to sell the Kiwi against the Aussie at 0.9400. The Kiwi has some catching up to do to the lower AUD/USD exchange rate that is now trading below 0.7700. The NZD/USD rate did briefly dip below the key support level of 0.7180; however, it did not close below that point.

Over coming weeks and months, it is difficult to see what domestic economic factors could move the Kiwi dollar upwards or downwards. The economy continues to expand at a decent clip with our export commodity prices at multi-year highs. Counter-acting those positives are potential risks around disruptive industrial action and policy changes like the minimum wage and youth wage having unintended negative consequences for jobs and the economy. 

The tit-for-tat retaliatory trade tariff announcements and measures between the US and China are not good news for the US economy, the Chinese economy and the global economy.

President Trump does not seem to understand or care about the damage he is doing to the US economy by initiating trade wars.

For an export/import economy like New Zealand, relying on free global trading conditions, the recent development towards outright trade wars is very bad news indeed. We rely heavily on both China and Australia and we have seen the immediate reaction by the financial/investment markets to the trade wars is to sell Chinese equities and sell the Aussie dollar.

The escalation of import tariff barriers is negative for the Kiwi dollar for the following reasons:-

• The NZ economy has benefited and reaped the rewards of free-trade agreements over the last 30 years; the world now heading in the opposite direction to protectionism reduces our balance sheet value.
• Weaker than expected global growth means lower commodity prices and thus a growth/commodity currency like the Kiwi dollar falling out of favour.
• Retreating global equity markets has investors in “risk-off” mode and the NZD always weakens in this environment.
• US inflation increases at a faster rate than what would otherwise been the case with tariffs on imported products being passed through to US consumers. The Federal Reserve may well need to lift the tempo of interest rate increases above current market expectations and thus the US dollar strengthens as a result.

The new Governor of the Reserve Bank of New Zealand, Adrian Orr is in place this week; however, the FX markets will have to wait until the next Monetary Policy Statement on 10 May before they can get a read as to whether the change in personnel will alter monetary policy direction.

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.