By Roger J Kerr*
The NZD/USD exchange rate has tested both ends of its current 0.6700 to 0.6850 trading range over this last week.
Firstly, failing to push up through the resistance level at 0.6850 and then the NZD weakening back one cent to 0.6740 due to a stronger US dollar on global foreign exchange markets.
The USD made gains against all major currencies following the Federal Reserve statement that the US economy remains robust and inflationary pressures continue, thus two further interest rate increases seem highly likely before the end of 2018.
The EUR/USD rate has moved below $1.1600 on that momentum (i.e. USD strengthening).
However, further USD gains from here appear unlikely as the tit-for-tat trade war with China escalates into a dangerous game of brinkmanship.
Whilst the Trump administration believe they will be successful in pressurising and blackmailing the Chinese into making concessions on tariffs for US goods into China, the damage to the US economy in the meantime will soon be showing up in economic statistics.
Already the ISM manufacturing index in the US is coming off as business firms experience squeezed profit margins (due to higher raw material costs from import tariff increases) and reduced investment/expansion intentions.
The US economy has performed very will in recent years due to low interest rates, lower tax rates and reduced regulations on business. The forward view cannot be as positive as the past performance as US manufacturers are hit by the unnecessary trade wars.
The latest US jobs numbers for July at +153,000 were less than the forecast +190,000, however prior months were revised upwards, so the weaker July result did not disturb the US dollar’s value.
Do not be surprised to see President Trump have another go at the Chinese and Europeans about manipulating their currencies to weaker levels against the USD following this latest bout of USD gains to below $1.1600 against the Euro. Trump favours a weaker USD currency value as that helps US exporters. A return of the EUR/USD rate to above $1.1700 should see the Kiwi dollar pushing up above 0.6800 again.
Domestic factors for the Kiwi dollar have not been positive over recent times. The collapse of yet another construction business last week does not really reflect a problem with the overall economy, more a management problem within the building industry as tendered prices for work fail to reconcile with current costs and time variables.
However, for some, these company failures may reflect weakening demand in the economy and they add to the sinking business confidence levels.
As stated previously in this column, foreign investors are not going to be positive on the NZ economy and currency if they see that the locals are so downbeat on their own prospects.
Certainly, the plummet in business confidence over the last nine months is more than just a protest vote by business folk to a left-leaning Government.
It reflects ongoing uncertainties around employment law, wages, taxes and environmental over-rides (e.g. irrigation investment and oil/gas exploration bans).
The Labour Coalition Government stated at the start of the year that they were keen to work with business in a cooperative fashion. There has been no sign of such cooperation to date and all the business community see is cabinet ministers attacking individuals at the top of our largest companies.
New Zealand Inc currently is crying out for direction and leadership, sadly it is not coming from the Prime Minister or the Finance Minister.
Therefore, the responsibility to restore business confidence for the good of the economy and jobs must fall on the likes of Adrian Orr at the RBNZ and private sector business leaders such as Xero’s Rod Drury and Synlait’s John Penno.
Former Prime Minister John Key’s recent “less than positive” assessment of global investment markets and the NZ economy did not help the gloomy mood.
There is no reason to talk ourselves into an economic downturn, it just requires someone to add a balanced view of the positives alongside the risks/challenges. High export commodity prices continue to be a major positive for the economy and currency, certainly matching-off the negative business confidence environment. An unfortunate negative environment that has been largely self-inflicted by Government inertia and decision-making vacuums.
The Australian dollar has again bounced back up again from the 0.7350 level against the USD. Metal and mining commodity prices going no lower and improving economic indicators (outside residential property value) are supportive for the Australian currency. The AUD has outperformed the NZD against the USD and driven the NZD/AUD cross-rate to the bottom of its well-established range at 0.9100. Around 0.9100 has always been a valuable forward hedging entry point for AUD exporters over recent years.
*Roger J Kerr is an independent treasury Management advisor. He has written commentaries on the NZ Dollar since 1981.