Roger J Kerr says the big sell-off that has been seen in the Kiwi dollar is really due to the falling Australian dollar - which itself is a reflection of the weaker Chinese economy

Roger J Kerr says the big sell-off that has been seen in the Kiwi dollar is really due to the falling Australian dollar - which itself is a reflection of the weaker Chinese economy

By Roger J Kerr*

The Kiwi dollar has staged something of minor recovery against the US dollar over this past week, lifting to above 0.6500 from the lows of 0.6440 a week ago.

The Kiwi will only be out of the woods from further depreciation if the selling interest has been exhausted at these levels.

Time will tell on that front, however, as expected the US dollar itself has failed to strengthen below the resistance level of $1.1500 against the Euro.

A marginally weaker USD to $1.1560 against the Euro has been the global currency markets response to the latest meltdown of share markets around the world over recent days.

It tells us something constructive about whether the Kiwi dollar selling has run out of steam when the NZD/USD rate increases in the face of a plunging Dow Jones Index.

Typically, the NZ dollar weakens when there is a “risk-off” sentiment pervading global investment and financial markets.

Should the downward “correction” in equity markets continue over coming weeks and the USD continues to weaken back to $1.1800 against the Euro, the Kiwi will be set to make further recovery upwards to 0.6700 and 0.6800.

It might be a brave person that says it, but in a world of investment market turmoil and uncertainty it would not be too unusual to see some funds flowing into the Kiwi dollar as a safe-haven destination well away from the carnage.

US interest rate potentially going higher than the market previously thought seems to be the prime reason for the equities sell-off.

Federal Reserve boss Jay Powell may have made something of a monetary policy blunder in pontificating that the Fed may have to go above their target 3.00% neutral interest rate next year.

His predecessor, Janet Yellen, would never have scared the horses on Wall Street with such a statement. A Powell retraction would be negative for the USD over coming weeks. 

The reasons behind the 10 cents depreciation of the Kiwi dollar from 0.7400 in April to 0.6440 last week are not what you might read about in the popular press. Most of the local commentary on our exchange rate is that the Kiwi is plunging in value due to one or all of the following reasons: -

  • Business confidence has collapsed because the Labour Coalition government has created uncertainty in tax, employment and investment. Business people are hardly going to get all positive again with the PM and Government Ministers finding new business targets to attack this last week, being oil companies and supermarket chains. Who’s next?
  • US interest rates have increased well above those of New Zealand, leading to foreign capital outflows from NZ.
  • The highly indebted housing market is about to collapse, reflecting some upcoming economic demise, thus the currency is depreciating in response.

The real reason why the Kiwi dollar has declined 10 cents is that we follow our big cousin currency across the ditch in lock-step and the AUD/USD exchange rate has dived 10 cents from 0.8100 to 0.7100 against the USD this year (refer chart below). International investors and FX speculators buy and sell the NZD in tandem with their AUD trading activities. 

Why has the Australian dollar depreciated so much over a period when their economy has been tracking along rather well? (i.e. above 3% GDP growth and the IMF forecast that to continue). 

Many global investors regard the Aussie dollar as a proxy for China and Chinese economic performance. They buy the AUD when the see strong Chinese economic data as the Australian economy is highly dependent on the Chinese buying their mining and energy resources. Stronger infrastructure investment and construction activity in China is always seen as positive for the Aussie dollar.

The AUD weakens when Chinese economic data slows up on previous impressive rates, and this has certainly been the case over recent months with the US trade wars adversely impacting on China.

The Chinese eased their reserve ratios on the banks last week in attempt to restore stronger economic expansion. In response, the AUD/USD rate stopped falling and recovered up from 0.7050 to above 0.7100. Further AUD depreciation is unlikely in the face of the Chinese not wanting their currency, the Yuan, to depreciate much further above 6.92 against the USD as that would weaken their negotiating position with the Americans on any trade talks.

Many investment markets around the world remain under extreme downward pressure on values from US equities, to Hong Kong real estate, to Italian Government bonds, to the US Treasury bond market sell-off, to Emerging Market currencies and the giant scam they call crypto-currencies.

In contrast, New Zealand looks a comparatively safe place to have your money currently. The currency has just depreciated 13.5% over the last six months (i.e. good entry levels), the Government has just recorded a massive budget surplus and agricultural commodity prices remain at 40-year highs. All good reasons for the smart money to start to rate the Kiwi dollar in a different light.

One announcement that could rattle Kiwi dollar buying decisions along this coming Tuesday will be a CPI inflation increase for the September quarter coming out above consensus forecasts of 0.70% and substantially above RBNZ forecasts of +0.40%.

There are already signs that higher fuel prices are pushing up many other prices in the economy, thus the RBNZ should not be ignoring (“looking through”) the oil impact.

Email:  

 
 
 
 
 
 
 
 

Daily exchange rates

Select chart tabs »

The 'US$' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'AU$' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'TWI' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '¥en' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '¥uan' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The '€uro' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'GBP' chart will be drawn here.
Loading...
Daily benchmark rate
Source: RBNZ
The 'Bitcoin' chart will be drawn here.
Loading...
USD 
NZD
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.

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.

13 Comments

Have to agree with Mr Kerr that CPI could very well overshoot economists forecasts.Whatever the case it is coming in stronger than prior forecasts. Against the Aussie this week , with RBA minutes,employment data and multiple global issues at the fore , NZD may win the trifecta or quadsomething against its cousin. Currency to watch , undoubtedly the JPY,, another sell off overseas could see it benefit the most.

'It's not about us' It's them...

Have you ever thought that maybe the fact that we don't matter to the world economy means that we don't matter much when the risks are rising. Every week there's a new rally forecast that focusses on one issue effecting the currency (milk, US interest rates, China, Australia), completely neglecting local risks (over indebted households and major businesses) as well as the magnitude of a host of other reasons for our currency to continue to slide. The next stop is sub 60 cents US, possibly before Christmas and I can't see why every week there is an expectation of a rally? I can't see it in any data.

It seems Mr Kerr is not a trend following sort of chap. He is a more the sort of fellow who thinks that markets should jolly well reflect what he thinks is fair value. At some point he will of course be right. To me markets are often more like a deranged thermostat that hunts to one extreme and then hunts to the other extreme. You can call that mean reverting if you must, but it misses the point.

Prior articles from him show more than a little bit of selective data gathering, with the selection of data invariably pointing to an increase in NZD. He hasn't been correct in his predictions for over a dozen articles over the past several months. At some point the stopped clock will be correct... In my view, being correct, but early, is still incorrect. He is like the proverbial economist that has predicted seven of the last two recessions.

Yet another lower high, followed by yet another lower low. The trend downward continues...

“There are already signs that higher fuel prices are pushing up many other prices in the economy, thus the RBNZ should not be ignoring (“looking through”) the oil impact.”

Agree – although I have a nagging suspicion they may endeavour to – lower for longer Mr Orr?

“Federal Reserve boss Jay Powell may have made something of a monetary policy blunder in pontificating that the Fed may have to go above their target 3.00% neutral interest rate next year.”

Disagree – The Fed waited too long to normalise, neutral may not cut it – and time to remove the unshakeable market perception of the Fed’s willingness to provide cheap and easy credit as and when the market demands.

Kiwi is set-up for a nice rally if CPI comes in hot and/or it quietens down in the market. But when as Roger points out, you drop 13% - then a decent short covering rally should be expected.

However that with the Kiwi at .65 even before we start to see the results from Higher oil prices/Negative business sentiments flow through into consumer demand/NZ economic data - that probably indicates that the Kiwi could have a lot further to fall in the coming months - if business sentiment actually reflects where the NZ Economy is heading.

Well well I totally agree with Roger ,
“it might be a brave person that says it, but in a world of investment market turmoil and uncertainty it would not be too unusual to see some funds flowing into the Kiwi dollar as a safe-haven destination well away from the carnage.”
I said the same on this blog many months back
GFC2 will create so much unpredictability that the $NZ will indeed provide a clear safe haven for many astute
decision makers

So you're calling GFC2 then?

Please refrain from superstitious questions Nic
Are you questioning GFC2 will not eventuate ?
Keep that humour coming Nicky

Northern Lights. You know as well as I do that there will be a big earthquake in the markets at some point, I still don't think that this is it yet though. Whether it's Brexit and the corporate derivatives market that causes it. Italy and government debt. The US deficit, Chinese speculation with 300% of GDP private debt washing around the casinos of the world or just a good old fashioned nervous crash. What I would argue though is that NZ is neither a big enough economy or currency for the world to fly to it and therefore will be a long way from peoples minds when the loans start getting called in.

NZ dollar as safe as houses? Are houses safe? Now the Chinese market is crashing and no one can say that they have a shortage of people to prop it up....
Leveraged speculation will cause a crash somewhere in the system and that will cause a worldwide game of dominoes. Will it be a GFC2? Who knows, but it won't have a fairy-tale ending and the magic pills that sorted the last one have all but run out this time. As for the New Zealand Dollar... If history is anything to go by then I wouldn't bet the house on it if I were you. Or maybe you already did!

NorthernLights,

How did that flight to safe haven work out for the NZD in the prior GFC? For me, it worked quite nicely, as I got to transfer USD into NZD at nearly 2:1. Last time, NZD wasn't a very safe haven...

Exactly. In terms of major global capital flows, the USD is the main show in town. With the Euro about to say goodnight in the not too distant future, European capital will pile into the USD/US equities. The NZD will head south while this occurs.

Goodnight Kiwis