By Roger J Kerr*
Both currency market and economic conditions have improved for the Kiwi dollar over recent weeks.
A combination of a recovering AUD (the Kiwi follows most of the time) and weaker USD on global forex markets has allowed the NZD/USD rate to make further gains to above 0.6900. Despite a lot of negative commentary in the media against the Australian economy and thus the Aussie dollar, it has posted some confident gains of late.
An Australian CPI inflation result for the December 2018 quarter last week at +0.50% was marginally above prior market forecasts and hosed down considerable expectations that the RBA was about to cut their interests rates. The AUD moved from below 0.7100 to near 0.7300 against the USD as a result.
A surge upwards in the Australian Terms of Trade Index (import/export prices) was another positive, however not unexpected as their metal and mining commodity prices have been stable and the AUD has depreciated over the second half of 2018. The RBA make their next OCR interest rate decision on Tuesday 5th February and full Monetary Policy Statement on Friday 8th February and they will not be inclined to change their current stance that the next change in Aussie interest rates is upwards (albeit some time away).
The RBA will be well aware that the economy should record solid GDP growth this year as their resources sector enjoys higher prices and a lower AUD currency value. There is also a raft of other Aussie economic data being released over this coming week, from building activity, job adverts, manufacturing PMI, import/export trade and retail sales. In New Zealand, the Kiwi dollar could also benefit from higher dairy prices (GDT auction) and employment/wages statistics on Thursday 7th February.
In summary, no apparent reasons for neither the AUD nor the NZD to give up any of their recent gains against the USD.
Credit rating agencies deliver a positive message
Assisting the more positive sentiment towards the Kiwi dollar were positive reports on the NZ economy from international credit rating agencies Standard & Poor's and Fitch. S & P have affirmed the NZ Government sovereign credit rating at AA and upgraded the outlook from “stable” to “positive”. They stated that we are benefiting from our flexible fiscal and monetary policies, resilient economy and stable public policies. The Government’s finances are in good shape and S & P forecast the economy to expand by 2.8% this year. The rating agencies’ commentaries on our economy are always a bit dated, however at least the external view is unbiased and positive. Very different from some of the local drivel that always seems to see economic “headwinds” and impending doom from a housing crash. If there were a rising risk for the NZ economy today, it would be the very sudden and very dry summer weather conditions. The Waikato region was extraordinarily lush, green grass at Christmas, however just over a month later the fields are browning off rapidly. Cows drying off early will reduce agricultural production in the North Island over coming months. The South Island has the protection of a lot more irrigation.
Trade war risk continues to reduce
The two global factors that have been highlighted in recent commentaries as developments to weaken the US dollar are now coming into play. Federal Reserve boss Jay Powell re-confirmed the Fed’s pause with interest rate increases last week and the US and China seem to be making progress on the trade negotiations. The USD softened to $1.1470 against the Euro after the Fed meeting and rather instructively, the USD failed to strengthen following the positive 304,000 new jobs added in the US economy in January. The financial and investment markets are now anticipating that Premier Xi Jinping and President Donald Trump will announce some kind of trade deal before the end of February. The Chinese have agreed to buy large quantities of soybean, so there is progress. Intellectual property rights and their enforcement may well still be a major sticking point. I still expect the USD to weaken above $1.1500 against the Euro when some form a trade deal is agreed between the US and China. Global investment funds returning to bargain equity and currency values in Emerging Market economies now that the trade wars and US interest rate risks have seriously reduced, is also positive news for the Kiwi dollar.
RBNZ focussed on other matters, no surprises with monetary policy
On the domestic front, the markets will be focusing on the RBNZ’s Monetary Policy Statement on Wednesday 13 February. A very similar statement to the early November statement is expected, wherein Governor Orr was not as dovish as his earlier May and August statements. The big change from November is that global risk factors affecting the NZ economy have reduced substantially. The equity markets have recovered/stabilised and the prospect of global growth being a lot weaker due to trade wars and higher US interest rates has also reduced significantly. Governor Orr has been busy sorting our miss-conduct and miss-selling in the banking and insurance industries of late, so he will not be making any big calls on monetary policy. In any case, he is currently looking for a new Chief Economist, so do not expect any sudden shifts in monetary policy settings in 2019. I do not see the RBNZ surprising the financial markets this year to cause the Kiwi dollar to shift violently up or down. That was not the case in 2018 when the May and August statements were overly dovish, sending the Kiwi dollar unnecessarily lower. The subsequent strong recovery in the NZD/USD rate to 0.6900 today from 0.6500 in October tells us the expected negatives for the NZ economy did not eventuate.
Several positives for the Kiwi and the negatives are dwindling
Further gains to above 0.7000 over coming weeks/months has a higher probability due to a stronger AUD, weaker USD, higher dairy commodity prices and strong foreign investor inflows into NZ commercial property and other assets by massive UK-based funds.
*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.