By Roger J Kerr*
The Aussie dollar was trading quietly around 0.7150 against the USD last Thursday 21 February ahead of their January employment data, which the prior forecasts were for a 15,000 increase in jobs over the month.
A much stronger than expected job increase of +39,000 propelled the AUD immediately higher to 0.7200, pulling the Kiwi up to neat 0.6900 against the US unit.
The euphoria of a positive economic number for the Aussie dollar bulls however proved to be short-lived with Westpac’s economists immediately coming out with a new bearish forecast of two OCR interest rate cuts in 2019.
Whether the timing of the Westpac announcement was coincidental or not we will never know.
If Westpac’s proprietary FX traders had forewarning of the negative OCR forecast release from their banks’ economists they would have been the aggressive sellers of the AUD up near 0.7200.
It certainly reversed the direction of the Aussie dollar in the forex markets with the AUD/USD rate plunging to a low 0.7075 on Friday.
The NZD/USD rate reached a low 0.6770 on Friday 22 February, however has since recovered to 0.6840. The whip-saw movements of both currencies in the end turning out to be a bit of a storm in a tea-cup, as the Kiwi returns to a level at the end of the week very similar to where it started. The previous 0.6750 to 0.6950 trading range for the NZD/USD rate continues to hold firm with the daily ranges closing-in on the mid-point of 0.6850.
It is difficult to see what the local negative factor could be to push the Kiwi below the 0.6750 support area in the short to medium term.
The next major economic release is the December 2018 quarter’s GDP growth number on 21st March.
Retail sales figures for the December quarter on Monday 25 February could prove to be an important lead-indicator for the overall growth numbers. Both retail and GDP were flat in the September 2018 quarter and whilst it was not a boomer Christmas sales period for retailers, on-line sales appear to have been strong. A quarter on quarter Retail Sales increase above 1.0% will be positive for a GDP lift above the RBNZ’s forecast of +0.8% later next month. Such an outcome would be positive for the Kiwi dollar on its own accord.
Impact of Brexit and CGT on the NZ currency? - Zero
Many economic and financial market commentators seem to take pleasure in extrapolating the global news of the day and confidently predicting that these events will send the Kiwi dollar higher or lower.
The daily Brexit shenanigans is a good case in point, with the impending 31 March deadline looming as an event risk that will impact on the Kiwi dollar.
If the free transfer of goods across the UK’s borders is suddenly disrupted by a hard Brexit, some New Zealand exporters will be inconvenienced if they have not taken precautionary measures beforehand. However, the direct impact on the NZ economy and thus our currency value, in my view, will be negligible. If the Brits have managed to organise a complete mess for themselves, the consequences for us are in reality quite minor and remote.
Our politicians messing up our diplomatic and trading relationships with China is a much more serious matter, one that we cannot afford to be cavalier about. Let us hope that our GCSB quickly follow the lead of the UK and Germany Government security outfits and state that Huawei communications equipment offers no threat to New Zealand’s security. If and when Spark is allowed to use Huawei 5G gear it should be positive for the Kiwi dollar as the China relationship will be back on track.
The Coalition Labour Government’s Tax Working Group has recommended a far-reaching Capital Gains Tax regime that if implemented would stifle a lot of business and entrepreneurial investment in our economy.
One objective of introducing a capital gains tax in New Zealand was to attract investment dollars away from non-productive residential property assets and into productive business investment assets.
What has been recommended by the TWG appears to do the opposite.
The taxation technocrats in the Group have taken a purist taxation approach without understanding that all investment entails both risk and reward and therefore should not be treated exactly equal when it comes to being taxed. Our economy needs risk takers and the CGT recommendations will stifle and dissuade this important component. The minority group of three within the TWG have published an alternative view with a much more sensible “property speculation tax” approach that would probably be more politically saleable.
There was absolutely no impact from the CGT recommendations on the New Zealand dollar exchange rate.
Trade deal draws closer
President Donald Trump is not sure about a broad “memorandum of understanding” with the Chinese on trade tariffs, however a “trade deal” is what he wants and we could see such an agreement within a matter of weeks.
No matter which way you look at it, a settlement and agreement by the Chinese and Americans to reduce tariffs and sign up to a trade deal is very positive news for commodity/growth currencies like the NZD and AUD.
Our currencies weakened sharply in August to November last year when the US and China were trading insults with each other and both increasing import tariffs.
The opposite currency impact has to be expected when the tariffs are reversed. Watch for the Kiwi dollar to break up through the 0.6950 resistance level when “The Donald” is finally able to announce a victory for himself on the trade deal.
NZD/AUD cross-rate stalling at 0.9600 yet again
One limiting influence on further NZ dollar appreciation over coming weeks will be speculators in the NZD/AUD cross-rate unwinding their “long Kiwi/short Aussie” positions.
The punters will be selling Kiwi dollars to take their profits on the move up from 0.9000 to 0.9600 over the last four or five months.
The consistent trading pattern of the NZD/AUD exchange rate over the last five years has been that it never stays too long above 0.9600 when it spikes up to that level. FX market speculative positioning does play an important part in short-term exchange rate direction and thus a return to 0.9300 looks more likely over coming months.
AUD importers should be hedged to the hilt of policy limits at 0.9600, whilst AUD exporters who previously loaded up with hedging at 0.9000/0.9100 can continue to hold off and use up the hedging they have.
*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981.