Roger J Kerr says offshore investors looking to put capital into New Zealand would be fully justified in hesitating from doing so in the current political and regulatory environment

By Roger J Kerr

New Zealand inflation data for the March 2018 quarter, which is released this Thursday 19th April, may prove to be the catalyst to change the NZ dollar trading strategies of the currency speculators who have dominated the NZD/USD movements of late.

Not that there will be any surprises in the inflation numbers for the March quarter, however the dominant headline on the newswires is likely to be that our annual inflation rate drops sharply to 1.00%.

Large price increases in the March 2017 inflation figures drop out of the annual gauge and will pull the figure down.

As we witnessed in mid-January, a lower than expected inflation outcome is enough to depreciate the Kiwi dollar on the day as the timing of the next OCR increase in 2019 just gets pushed further and further away.

The reaction by the NZD speculators will be important as the hedge funds and proprietary trading desks who punt the Kiwi dollar again stacked up long NZD positions (bought Kiwi) when we had the last dip to 0.7180.

The subsequent climb upwards to 0.7360 last week was due to this short-term speculative trading and not based on much else.

The CPI result could well be the catalyst that prompts these long NZD position holders to reverse engines and become aggressive NZD sellers. Therefore, further gains by the Kiwi above 0.7400 are not anticipated.

However, it may need other New Zealand specific negatives other than this week’s inflation outcome to drive the Kiwi below the 0.7180 support level.

The dramatic appreciation of the Kiwi dollar against the Aussie dollar from below 0.9100 only a few weeks ago to 0.9500 today is partly explained by iron ore commodity prices plunging on China/US trade war factors, whereas New Zealand’s key export commodity price, whole milk powder, has remained very stable through this period.

However, the commodity price differential is not expected to continue in New Zealand’s favour with other key commodity prices like beef now falling.

It will need a recovery in iron ore prices and lower NZ agricultural commodity prices to reverse the NZD/AUD cross-rate back to the 0.9200 level.

Again, the speculative fraternity are more likely to be Kiwi sellers against the AUD at 0.9500 than buying it up further.

Historical trading patterns in the NZD/AUD cross-rate over recent years strongly suggest that steep increases to 0.9500 are typically followed by dramatic declines as the speculators reverse their positions.

The Kiwi dollar’s outperformance of the AUD against the USD may have been justified over past years when New Zealand’s economic performance (GDP growth) was superior to that of the Aussies.

However, this is not the case today with business confidence (hence investment) remaining weak in New Zealand with much uncertainty about how the Labour Coalition government’s policy changes will affect the wider economy.

Profit taking by the speculators on current long Kiwi/short Aussie positions looks set to reverse the direction of the NZD/AUD cross-rate to lower levels over coming weeks.

Offshore investors looking to put capital into New Zealand would be fully justified in hesitating from doing so in the current political and regulatory environment.

The Government’s Draconian decision without consultation to suddenly stop new oil and gas exploration sends a clear message to other industries requiring foreign capital to expand i.e. don’t invest in New Zealand as the Government cannot be trusted, as they change the rules overnight.

The “you are not welcome” mat has been stuck in front of the noses of foreign investors into New Zealand and the precedent it creates is alarming.

For an economy that requires foreign savings to fund our structural Balance of Payments deficit that is an extraordinarily naïve position to take.

The implications for the NZ dollar exchange rate are hardly positive.

When you add on the fact that we no longer have any interest rate yield enhancement over interest rates elsewhere in the world, it is not difficult to see New Zealand now being right off the radar screen of all types of foreign investors.

To date, the escalating trade wars between the US and their trading “partners” has not weakened the NZ dollar as might have been expected as our economy is so dependent upon free trade and export market access.

The continuing flip-flop position of President Donald Trump is impossible to read and the wider economic affects still very uncertain.

Whilst increased tariffs on US exports into China will hurt US farmers (soya bean and pork), US consumers can expect increasing prices in their retail stores on imported product.

The ultimate retaliation weapon the Chinese have is not only selling out of US Treasury Bonds, but also making life very difficult for US firms doing business in China.

For example, General Motors does not export many cars into China, however with joint venture partners it is a major manufacturer of cars in China.

Chinese government supported consumer boycotts of foreign goods/businesses has already been seen against Japanese and Korean firms. Trump’s extreme position negotiating tactics used in his real estate career is unlikely to work in US trade economics.

International investment market “risk off” sentiment due to the trade wars and Syrian military strikes is more likely to be negative for the Kiwi dollar in the currency markets over coming weeks.

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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.

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41 Comments

The oil and gas announcement had to be made before Jacinda went to CHOGM to virtue signal. There was no time for consultation with those affected or thinking what kind of message this sends to foreign investors.

New Zealand is open for business but we may suddenly pull the rug out from under your feet without notice or consultation. No wonder foreign investors are shying away.

...to virtue signal.

Interesting we're seeing National politicians and their votaries increasingly use the term "virtue signal", Judith Collins' use sometimes being painfully awkward.

Wonder if they're co-opting it from the American Right - perhaps they've found it plays well in their focus groups. Another step down the road to a NZ Tea Party.

You can always see when the politicans have done their jobs on catch phrases.

Just looking around Social Media or searching for the term on google trends see's a large spike after politicans use these terms.

Has happened in huge volumes over the last 2 years in the US and seems to be a thing occuring in NZ now.

My only hope is that we stop pandering to catch phrases for marketing ideas and start looking at the actual issues. We don't need this sort of Cambridge Analytica attack on information in NZ

Its an action that's been looking for a description. Virtue signalling has been practised by politicians and corporates forever its just recently we've had two words that describe it well.

Another great one is "known unknowns and unknown unknowns", although its so 2001.

I think it's perhaps the increase in Awkward Judith usage that makes it stand out so.

I am only surprised Kiwi has held up under the barrage of new anti business legislation and talk from Labour.
I suspect the party will end in tears with a large fall in the rate vs the USD and AUD before the year end That should see the NZD AUD back to 1.12 nd NZD USD around .68

@alpappy .......... dont worry , currency traders know that the Government plan to ban oil has absolutely no chance of ever succeeding , so they will not bother punting against the currency.

Besides , this COL masquerading as a Government, has just inherited a spectacularly and amazingly well run economy from National , with a budget surplus , high employment , little debt , stability , a free market economy and great prospects .

Currency traders also know that this Government will not last , its going to collapse in an ideological heap , and we will get back to a Government that is grounded in reality and focuses on the correct things to achieve sustained growth and a better life for our citizens ................... not wishful thinking and ideological claptrap .

oh, maybe because they are not banning oil.

You cannot have (sustained) growth for ever on a finite planet. Our entire economic system is based on using up non-renewable resources.

Wah Wah Wah ... oil banned, communist government, so much new red tape since last October, unitec land won't fix Auckland housing.

Every post you make here sounds more delusional and hysterical than the previous one. Are you even living in the same country as others here?

And since when were currency traders the arbiters of good decision making? Since the high priest of "do-nothing" govt, the master of 3-way handshakes, Mr Key decided to give politics a go and then bailed out?

You are delusional, the proof? the kiwi isnt effected.

By all means state the full game on your opinion, and then come back if it ever happens and you can show the effect is the cause you suggest.

"The Government’s Draconian decision without consultation to suddenly stop new oil and gas exploration sends a clear message to other industries"
Yes it does. It says NZ takes climate change seriously and listens to overwhelming scientific research that says the natural transition off fossil fuels is simply not happening fast enough and government intervention is absolutely necessary.
No matter what economic spin you choose to put on this, it doesn't change the fact that climate change is happening right now and the measures we all need to take will absolutely hurt the economy, but we must do it anyway.
If you don't agree with the governments current measures, then fine. But if you can't come up with a better alternative then simply get out the way because doing nothing is not an option!

It's probably true that the measures needed to address climate change will hurt the economy, at least in the short term and taking a strictly narrow view of the economy.

But it does not follow that if a measure hurts the economy, it will address climate change.

This measure does hurt the economy. And it does absolutely nothing to address climate change.

There are plenty of better alternatives, but actually you only really need one. Put in place a serious emissions trading scheme with no exceptions, limited free allocation and no access to international carbon credits unless they are genuinely linked to genuine carbon savings. Then sit back and watch the market work.

I agree but ETS is not the answer. It just leads us down a path where only the rich can pollute.

While rich people would be better able to afford the pain of having to pay more for carbon-intensive goods, it doesn't mean that they will do so. Rich people don't get to be and stay that way by taking on unnecessary expense. They are more likely to be able and willing to pay the upfront extra cost, eg solar power, low-emissions vehicles, in order to realise the financial savings (and carbon reductions) over the longer term.

Poor people by contrast don't have so many options available to avoid the costs and so they are the ones likely to carry on polluting despite the cost. If you're not comfortable with that, the way to address it is by transferring more resources to poor people so that they can afford to not pollute, not by allowing them a free pass to carry on polluting.

Frankly , we look like idiots BANNING oil and Gas !

We are out of step with not only the rest of the world , but out of step with reality.

We cant just pretend that banning oil and gas will somehow miraculously cause a climate change reversal .......... its just plain delusional .

Our annual fuel consumption for the whole country is the size of a medium -sized city in Asia or Western Europe .

We can reduce oil consumption over time , but banning it is fool-hardy .

If anything , we should start by banning coal which is way more pollutant than gas.

The Labour Party roots are in the coal mines so banning the stuff isn't an option.

Nothing in your post makes sense nor is it true.

NB
Considering most countries have signed up for CC accords, no.

No one said stopping using oil and gas will reverse climate change what they do say is if we dont stop the changes taht will happen means we are almost certianly extinct as a species inside of 150 years, certainly our civilisation with no agriculture system to speak of will be.

So we are small? so what we are one of the worst emitters per capita ergo if this is going to happen we need to do our part.

We will indeed reduce oil consumption over time, this is a method by which it starts to happen

Coal. yes, ban all new coal mines and accelerate wind and solar which are now all but cheaper anyway.

nonsensical comment. only an idiot would ban oil and gas exploration before other alternatives were put in place.

by all means tax the producers, and offer rebates for renewables to encourage but to ban outright. stoooopid!!!

steven,

You should know by now,that nothing Boatman writes ever makes sense and is seldom true.As my dear old grannie used to say,empty barrels make the most noise and B. rattles almost as loudly as Hosking.

"Banning oil & Gas"...a bit over the top,the statement is actually:
"Govt ends new offshore oil & gas exploration..."

And existing exploration permits remain valid up to 2030.

But this gets rewritten as "bans oil and gas".

Great article! The Left in NZ fails to see the impact of the government's decision on NZ living standards, as foreign investors shy away. Energy prices will spike, as the alternatives are much more expensive.

Foreign investors are no loss, instead we keep the profits with NZers overall.

@steven ........... you clearly dont understand that we have hopelessly weak Capital Markets here in NZ , we simply dont have the depth of Capital that exists elsewhere .

We down own our banks because we dont have the money and capital to do so

Thats why when we listed the Power Companies the take-up was so poor and we sold shares to Aussies and overseas investors

We really need foreign CAPITAL

We have weak capital markets here in part because everyone is incentivised to invest in property instead of in business.

Rick, what business opportunities can you point to that NZ missed due to a lack of capital market depth? Secondary share market sale/purchases simply recycle money, so I'm talking about IPOs.

The profits will be going to the foreign countries we will be importing oil and gas from since the Col is doing nothing to reduce demand, just grandstanding about 'banning' and no solid practical plans for replacement sources.

Peopls who exploit the tax system and benefit by speculation are bound to cry.

Having a ban on Foreign buyer is the right thing to do. Will also help in curbbing money laundering.

Peopls who exploit the tax system and benefit by speculation are bound to cry.

Having a ban on Foreign buyer in residential propergy is the right thing to do. Will also help in curbbing money laundering.

If not many foreign buyer as per National and its supporters so why worry, if the percentage is 3%.

There is no foreign buyer ban on residential property. Labour and NZF promised this ban but it never happened.

Roger nails it with his comments on international investment being wary of a shifty regulatory environment. Imagine if an offshore company wanted to invest $500MM dollars into a large scale manufacturing facility dependent on the logging industry - I’m sure they would be wary of investing in that if they current government decides that because of some extraneous reason they can’t operate it after they build. The government wants to talk about pumping up the regions but the back bone of the regional economies are primary industries and natural resources. We can talk up tourism all we want but at some point in time you are at the limit of our infrastructure plus I can’t see Taranaki or Greymouth becoming national centers for financial services. What we have are shortsighted actions by politicians who are blind to the real world.

@oaradox , precisely , Capital needs certainty , and will only invest in unstable a shifty and unstable places if :-

1) There are super-profits to be made ( such as Iraq or Nigeria )
2) The claw-back of any sunk cost is under quick like under 24 months
3) There is no risk of getting BANNED arbitrarily and without consultation

@Boatman. Couldn’t agree more. The competition for capital globally is fierce. We are losing our edge under this government unfortunately due to ideology. We can be leaders in progressive causes but you need consultation with the private sector and a real transition plan - not buzz words.

Disappointing and fraught with risk for Kiwis now and on the future. People are all giddy with the track record of the last few years and miscalculate the risk. A serious recession with significant unemployment given the level of household debt, lack of savings and little room for significant QE could cause a generational problem for this country.

Probably more than one Generational problem

ohhhagood grief....what bollocks. So how many lined up to invest $500mil into logging associated activity in the last 9 years under your golden boy Key? Sure they invested...but straight inot the housing ponzi.

Hasn't that gone well. Reality check. National have left a shambles - its not the coaltions fault.

You demonstrate the polarisation Kade highlighted in her Top Ten last week. Out Government has stopped selling parcels for oil exploration. this is wholly understandable due to global warming. they are not talking about banning investment in and industry that would add value to an existing industry. This polarisation is unhelpful in the debate.

I’m actually a Labor supporter but I think they got this one wrong. The debate is that this type of government intervention does not lay out the ‘welcome mat’ for capital investment as mentioned in the article. The logging example was arbitrary to be just that - an example. This is not a climate change argument rather a pure economics debate and how we make ourselves attractive to investment in high returning projects that enhance the economy. It cracks me up that these threads always end up with insults and debates about Real estate. Nothing about this had anything to do with the housing market!

Internationally we are an outpost. Our economy is no larger than Phoenix AZ. Tourism is already starting to overflow our resources if we consider pollution as a yardstick. As Paradoxx states our greatest asset is primary production. We are advantaged by being largely off season to the great North Hemisphere markets. Dairy & timber are holding their own internationally. Meat and wool not so good. Fish has become entangled in regulatory complications. Viticulture is good, but in volume will always be tiny globally. NZ needs a whole lot more capital injection into its primary production as became necessary, almost involuntary in fact, with Siver FernFarms. But that has to be balanced with environmental protection and re-investment of profits for growth rather than dividends being repatriated. Does this government, not traditionally farmer friendly, have the capacity and astuteness to make this happen?

We aren't confusing the meanings of "investment" and "ownership" again now, are we?

That is a leading question. Sometimes there is little difference.For example, secured debenture holders rank higher than shareholders. Some debentures can be vested by allotting shares in their place. There are many mechanisms, clauses if you like, that can be written in that blur the line between investment and shareholding. Have to admit have been caught out on that one myself.

Years ago I attended an address explaining the way debt, eg what were promissory notes more or less, was traded in Victorian times and how that might, and indeed was common practice, allow one identity to get control over another etc etc. Often thought that the money go round revealed in 2008 , Merrill Lynch, Lehman’s, Fanny Mae, Bank of America and all the rest, was not that far removed from the same thing. Guess Obamas fixers thought the same, hence Bank of America “acquiring” Merrill Lynch.