Roger J Kerr says being over-reliant on a particular exchange forecast when managing FX risks has its own dangers when those forecasts suddenly change or are extreme and thus seem a long way from reality

By Roger J Kerr*

For the fourth time over the last three months the Kiwi dollar has yet again failed to hold on to gains above 0.6900 against the USD.

Despite global investment market sentiment continuing to improve through January and February, evidenced by rising equity markets in both China and the US, the Kiwi has again retreated from peaks of 0.6900 last week to trade back at 0.6800.

Typically, the NZD and AUD “growth/commodity” currencies make gains when international investment markets are in “risk on” mode because the confidence of investors is based on improving GDP growth and other risk uncertainties reducing.

The strong recovery in equity markets this year is all about no more US interest rate increases (the Federal Reserve’s January U-turn) and the real prospect of a Chinese/US trade agreement.

Therefore, it is a little surprising that the NZD and AUD have lost ground in this positive global environment.

The export commodity prices that both the Australian and New Zealand economies are so heavily dependent upon continue to increase. So, one can only conclude that the latest minor sell-down to 0.6800 in the NZD/USD rate and below 0.7100 in the AUD/USD are just speculative market positioning and thus not too sustainable.

Beware of sudden FX forecast changes!

Three months ago, in early December, this column stated that a “fair equilibrium value for the Kiwi dollar was between 0.6800 to 0.7000” and outside the Yen/AUD “flash crash” on the 3rd of January when the NZD/USD rate spiked down to 0.6600 very briefly, the Kiwi dollar has traded broadly within that anticipated 0.6800 to 0.7000 range.

It is not a “headline grabbing” prediction to have a view that the exchange rate will move sideways over a three-month period, however, import and export companies appreciate advice/viewpoint that currency movements will be stable within a certain range.

Being over-reliant on a particular exchange forecast when managing FX risks has its own dangers when those forecasts suddenly change or are extreme and thus seem a long way from reality.

One large Australian bank published an NZD/AUD exchange rate forecast last week of 0.9300 in 12 months’ time, however inexcusably and abruptly changing that forecast by three cents to 0.9600 when in front of an audience only a few days later. The concerning thing was that the bank did not appear to change NZD/USD or AUD/USD currency forecasts to produce the new 0.9600 NZD/AUD cross-rate forecast!

Another Aussie bank made media headlines during the week with a new milk solids payout forecast to dairy farmers for the 2019/2020 season of $7.30/kg.

The forecast was based on a US$2,800/MT whole milk powder price and then in small print in the footnote to the report “assuming an NZD/USD exchange rate of 0.6120”.

Let us hope that dairy farmers are savvy enough to ignore such forecasts and they certainly should not be basing their financial decisions on this bank’s predictions.

The bank in question has been consistently forecasting a much lower NZ dollar to 0.6000 for a few years now, supposedly based on a much stronger USD on global forex markets – which has just not happened.

Better than expected Aussie GDP growth to help the AUD?

How the Australian dollar reacts to a stack of Aussie economic data being released over this next week will also determine near-term NZD/USD direction.

Consensus forecasts are for a 0.4% increase in Australian GDP growth in the December 2018 quarter (released Wednesday 6th March), a result above this will be positive for the AUD (and vice versa).

A strong bounce back from the tepid +0.3% change in the September quarter would not surprise, therefore greater upside for the AUD is expected.

Retail sales and import/export data the next day on 7th March will also influence expectations about OCR interest rate changes/timing in Australia and thus the AUD exchange rate.

US Non-Farm Payrolls employment data for February on Friday 9th March (Saturday morning NZT) will also push exchange rates around if the figures are different to consensus forecasts.

After a massive 304,000 increase in new US jobs in January, the February numbers could turn out to be weaker than the +180,000 forecast.

The US dollar has weakened back to near $1.1400 against the Euro on a lower manufacturing performance in January as the import tariffs erode profit margins for US companies.

US GDP growth is also forecast to be weaker in the March 2019 quarter as the Federal Government shutdown disrupted parts of the economy.

Chinse economic data has started to improve over recent months after softening for much of 2018. The Chinese authorities have stimulated through both monetary and fiscal policy changes of late and the benefits are starting to show up in the economic data.

NZ economic data should also be a positive

New Zealand retail sales data for the December 2018 quarter were stronger than expected at +1.8% over the previous quarter, which augers well for a strong recovery in GDP growth in the December quarter when these figures are released on 21 March.

With dairy commodity prices now on the increase, a US/China trade deal not far away and the economy arguably performing better in 2019 than most of the pessimistic economic forecasts have suggested of late, it does not suggest an environment that would justify a weaker Kiwi dollar currency value. 



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*Roger J Kerr is Executive Chairman of Barrington Treasury Services NZ Limited. He has written commentaries on the NZ dollar since 1981. 

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Looking to a month ago, Roger Kerr wrote:

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.

How is that prediction working out?

Maybe there are a few other factors at play, including this:

lowering interest rates tend to hurt the currency, but Mr. Kerr somehow doesn't factor any negative bias, only positive bias.

I sense a degree of frustration in Mr Kerr's musings. Indeed our current group of economic forecasters appear to have no idea what is taking place in New Zealand. Last weeks forecasts and outcomes in relation to New Zealand's retail sales, terms of trade and consents , missed the mark, missed the board in fact . Thankfully unlike Statistics Canada , Statistics New Zealand , did release the data timely, although Statistics NZ have done the same before. Two major banks , Westpac and ANZ appear to have two entirely different views on the future OCR direction for both Australia and New Zealand. Given that ANZ saw Australian house prices continuing to increase on an annual basis (from December 2017), and the OCR rising in 2019 , while at the same time , as recently as December 2018, forecasting the RBNZ cutting the OCR to 1 percent in 2019, and Westpac seeing the RBNZ raise rates 3 times in 2021, and most recently the big change seeing the RBA make 2 cuts in 2019. The ANZ surveys for New Zealand almost appear out of whack . If Westpacs views are preferred the NZD could go thru parity for the second time this year against the AUD, but for a sustained period . The next two weeks economic data could provide the push, whether those in Martin Place provide the fuel , time will tell.The sudden odd movements in the AUD/NZD pair recently , suggest anything is possible. Unquestionably , our bank economists rarely offer reasons when their forecasts are so woefully inept.

So after months of calling the NZD higher has Mr Kerr finally given up. Seriously... cautioning against following his advice?

This is about as useful as a weather forecaster saying its blue skies and perfect beach weather... but to take an umbrella and jacket.. just in case.

I assume this column is now provided as merely comic relief...and Mr Kerrr needn't worry... I don't think anyone has seriously been relying on his forecasts for sometime.

After reading about a dozen of these duplicative article’s constantly advocating for a higher NZD one has to wonder whether what Roger’s personal investment position is. In other countries people writing about a particular security have to disclose what their short/longs are to prevent market manipulation. So Roger what is your investment position on the NZD?

A high dollar is positive for the average NZer.