Roger J Kerr says new RBNZ Governor, Adrian Orr may be at risk of playing the 'dovish' outlook-on-inflation-card a little too much, too soon in the current environment

By Roger J Kerr*

It has been a tough week for the Kiwi dollar on global foreign exchange markets with the NZD/USD exchange rate falling below the previous support area at 0.6850.

The fact that our short-term interest rates are now below those of the US is not the only reason why the NZ dollar has fallen slightly out of favour at this time.

First on the list as to why the Kiwi dollar is less attractive for foreign investors and speculators is the unavoidable reality that the offshore players are not going to have confidence about the NZ economy (and thus currency) if all the local business firms display a total lack of confidence in their own economic outlook.

Yet another fall in in the monthly ANZ business confidence survey last week was enough to send the Kiwi dollar lower.

Business confidence reduced sharply when the new Labour Coalition government came into power last October and has just not recovered.

The main reason for the continuing pessimism from the business community is that the new Government has created numerous uncertainties for both large and small business firms, namely; employment/labour market policies, immigration policy, housing policy, taxation policy and foreign investment policy.

Add on assorted frustrations at “over-the-top” health and safety regulations and the average business owner/operator is not a happy camper these days.

Some economic commentators and several Government Ministers have dismissed the low level of business confidence as merely “perceptions” and not reflecting reality in the NZ economy today.

In the hard edge of the global FX markets “perceptions are reality” and anyone who thinks they know better than what the FX market is telling them, are generally blown away.

The NZ dollar FX market is telling us that the NZ economy is expected to grow at a much slower rate of around 2% instead of the 3% to 4% we have achieved in recent years.

The lower level of “firms’ own activity” index points to sub-2% GDP over the next 12 months and the historical correlation between this index as a lead indicator of GDP growth is a very strong one.

It is difficult to see business confidence improving until the Government stops talking about what it might do in various policy areas and actually get on with making the changes and ending the uncertainty of the unknown in the business communities’ combined eyes.

Unfortunately, the relationship and cooperation between the Government and the NZ business community is not helped by the Acting Prime Minister and several cabinet ministers attacking our largest company, Fonterra.

The Government’s criticism of Fonterra and its governance leadership displays a poor understanding of business risks and challenges that every multinational corporation faces in doing business in places like China. Many European, US and Australian companies have lost a lot more money in China than Fonterra over the last 20 years in attempting to establish market brands and supply chain/distribution networks.

There would not be too many countries in the world where the Government of the day lambasts the largest company in the largest industry that the economy is so dependent upon!

The building of economic powerhouses like Japan and Germany a few years back and China more recently were achieved by mutual respect and cooperation between political and business leadership.

Sadly, the tall poppy syndrome is well ingrained in many New Zealanders (including our current politicians) and it is often detrimental to our reputation and advancement.

When the Fifth Labour Government led by Helen Clark and Michael Cullen came to power in 1999 it was faced with a “winter of discontent” as industrial disputes railroaded business confidence and the Kiwi dollar downwards.

This column warned of industrial/strike action emerging in mid-2018 as a negative risk factor for the Kiwi dollar back in March.

Recent currency movements suggest that this risk has been elevated.

Let us hope that the trade union sabre rattling of threats does not materialise into widespread industrial action that disrupts the economy.

Back in 1999/2000 the Kiwi dollar did initially weaken on all the uncertainty. The economy, however, quickly recovered with rising house prices, rising inflation and rising interest rates sending the Kiwi back upwards in the years that followed.

Acting Prime Minister, Winston Peters has always favoured a lower currency value as positive for the economy through exporters earning larger profits (albeit only in the very short-term).

However, most understand that exporters purely selling on “price” due to favourable currency movements is not a smart move in the medium to longer term.

An artificially lower currency value in New Zealand has an immediate impact of higher inflation (as we import nearly everything) that hurts consumers, as well as ultimate export competitiveness.

The recent depreciation of the NZD/USD exchange rate below 0.6800 will certainly increase inflation later this year. And much sooner than that a combination of higher oil prices, lower currency and regional fuel taxes will be hitting transport, freight and related prices.

New RBNZ Governor, Adrian Orr may be at risk of playing the “dovish” outlook-on-inflation-card a little too much, too soon in the current environment.

The probability of an interest rate decrease being equal to a rate rise is a total nonsense in this writer’s view with current trends in fuel prices, wages and business cost indicators. Escalation of global trade wars and import tariffs emerging all over the place adds to the higher inflation risk.

Despite international investor sentiment turning to the “risk off” mode of late due to plunging Chinese share markets, weakening emerging market currencies/markets and unsettling trade wars, the US dollar has remained in the $1.15 to $1.20 trading range against the Euro (as was anticipated). In this environment of unlikely further USD strength, both the NZD and AUD should have room to recover back upwards from recent depreciation.



Daily exchange rates

Select chart tabs »
The 'US$' chart will be drawn here.
Daily benchmark rate
Source: RBNZ
The 'AU$' chart will be drawn here.
Daily benchmark rate
Source: RBNZ
The 'TWI' chart will be drawn here.
Daily benchmark rate
Source: RBNZ
The '¥en' chart will be drawn here.
Daily benchmark rate
Source: RBNZ
The '¥uan' chart will be drawn here.
Daily benchmark rate
Source: RBNZ
The '€uro' chart will be drawn here.
Daily benchmark rate
Source: RBNZ
The 'GBP' chart will be drawn here.
Daily benchmark rate
Source: RBNZ
The 'Bitcoin' chart will be drawn here.
End of day UTC
Source: CoinDesk


*Roger J Kerr is an independent treasury Management advisor. He has written commentaries on the NZ Dollar since 1981. 

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

We welcome your comments below. If you are not already registered, please register to comment or click on the "Register" link below a comment.

Remember we welcome robust, respectful and insightful debate. We don't welcome abusive or defamatory comments and will de-register those repeatedly making such comments. Our current Comment policy is here.


Probably correct that the government sniping at Fonterra will not change or prove anything beyond what is already known. But then again Fonterra surely cannot act as if they are “caesar’s wife” but the hierarchy there, certainly behave as if they were. Every entity must be accountable for its bad management, but if the shareholders cannot influence the board and if the board cannot discipline the executive there will be trouble not only at the mill, but also down on the farm.

He sees a bottom in the chart. I see a downward trend.

I agree with a lot of what is said, but there is perhaps too much emphasis on NZ political processes here. Yes, this affects investment decisions and makes them riskier. The global context is also risk off, with collapsing currencies in much more globally important countries than us, think Venezuala, Argentina, Russia, Turkey. These are powerful regional players, not amateur league like us. Coupled with a collapsing stock market in China and the normal confusion in Europe, is it any wonder that money is flowing to America?

I agree that most economic cycle indicators point to a near term (next year or two) Financial crisis of some sort. We don't yet know what particular event will precipitate it, but certainly a time to be cautious.

The electorate in general don't appreciate that a falling dollar is the equivalent of everyone being given a cut in income. Unions might be chasing wage hikes, but a depressed dollar and lower growth GDP with higher inflation will render any real increase either small or even negative.

It is one of the wonders of the current system, everyone gets a 20% pay cut and no one notices. So competitiveness is restored despite local stupidities (like house price hyperinflation).

Also a two sided coin exports become cheaper and create growth .

Will the RBNZ do anything if the NZD falls to 65 cents, or even 55 cents? My read is probably no, unless wage inflation gets really out hand, like 5%, which seems unlikely. They are now committee based so will take even longer than usual to make up their minds. Adrian Orr seemed to be prioritising employment over inflation in his recent speeches. Inflation just hasn't been an actual real problem for so long that I think it won't be until the next cycle that it starts to accelerate uncomfortably fast.

With petrol prices up 25 percent nationally in the past year,something is going to snap sooner than later

Probably peoples patience with the current government

NZD heading to sub 65 cents this year, and sub 60 cents during 2019, regardless of business confidence.

that slow hey? not this month, next month?

Let's see. If I knew with any certainty I'd be a billionaire. Sub 65 cents in the next 1-2 months wouldn't be surprising, but I think it'll take longer for the emerging market and Fed tightening stories to play out.

The residential housing investment team with portfolios going nowhere in value and a government intent on driving down property prices, might be a tad quieter over coming months as they observe we offshore investors enjoying insulation from currency movement induced inflation. It's been a long time coming but the hedging benefit of diversification to other markets might just be about to pay off.

Auckland house prices have recently fallen about 5-10% relative to my offshore savings/investments.

Its been a genius play. Foreign capital gets sucked into our housing bubble - NZers use funds to support growth in business, infrastructure spending and reinvestment in the regions.

NZ remove foreign buyers, reducing capital inflows, dollar weakens. Foreign investors suffer double whammy of 20%-30% off housing and magnified by currency losses.

NZers use weaker currency to export more and improve current account weakness whilst benefitting from far cheaper asset prices at home.

So no more cheap cars and boats but houses get a lot cheaper and the foreign speculators get a whipping as do those that got out after John Key - that was the signal that it was over. Maybe he was always doing it in NZ's best interest?

I speculate - anyone care to confirm or am I way off here?? - NZ dollar drops. AUS banks then make less from NZ owned banks as the profits are repatriated at lower value. At the same time if we also have ppty dropping, thus the value of their NZ security in assets also drop. ie double whammy.

Is it possible that to keep their profits up, they will demand higher interest on the NZ loans?

A couple of thoughts;
- The AUD might drop at least as far as the NZD, infact I wouldn't be surprised if the NZD strengthened against the AUD.
- For banks, mortgages are the asset, so impairments/defaults would be where it really starts to hurt. Property values are part of that equation, especially if a mortgagee sale doesn't cover the outstanding mortgage. The NZ LVR regs might provide a bit of a buffer here. I would think falling property prices would factor in the bank's internal risk models that determine mortgage risk weightings.
- I have no idea whether the Big4 hedge earnings from the NZ subsidiaries but I would guess that they don't (in the long run this would be an additional cost).

Grant Robertson and Bill English in an interview last year (might have been on Q+A) both agreed they would like to see the NZD at 0.63 against the USD.

As someone moving to Australia and transferring money there, I've noticed the NZD/AUD cross-rates are still pretty good as the Aussie dollar has shown weakness against the USD also.

Interesting observation about the finance ministers wanting a lower NZD. Presumably they are hoping to balance the current account, not realising that it is capital flowing in that has kept it up. Flowing in to buy Auckland houses or new Auckland railways and roads, it is all the same. Each extra $1 of capital inflow must be balanced by $1 less of trade inflow. Simple bookeeping but surprising none the less.

No real mention in the article of “risk off” becoming centre stage.

Forgetting our internal carryings on – would a more risk averse playbook basically sweep the $NZ away along with all the flotsam that has been created over the last few years.

The 'over the top' h&s laws were implemented by the Nats business needs to get over that. Angry underpaid workers going on strike? All caused by National pushing the advantage to capital far far too far. Immigration overload causing economic gridlock and tourism overload ruining pristine areas. Don't blame Labor, the Nats did it!

$NZ currently filling up the tub and appears ready to take a soothing bath – recent low tonight of .6748.

Keeps trying to push lower over the last couple of weeks.

Business confidence defined:
A SURVEY compiled by an Australian bank who hired the former National Party Leader!
Who interviewed National Party supported Companies (aka voters or Nazi sympathizers) that predict doom & gloom on the economy then under pay staff (unless your an incompetent CEO) but boast healthy profits!! Nope nothing to see here folks!!!