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In his first column for 2022, Roger J Kerr assesses the three major forces driving the relative value of the NZD, and how they are likely to play out in the new year

Currencies / opinion
In his first column for 2022, Roger J Kerr assesses the three major forces driving the relative value of the NZD, and how they are likely to play out in the new year
USD and AUD compasses
Image sourced from Shutterstock.com

Summary of key points:

  • US dollar global currency direction in 2022.
  • Aussie dollar to continue to dominate Kiwi dollar movements.
  • New Zealand economy more likely to underperform in 2022.

As we enter a new year dominated by the “two’s”, 2022, we are reminded that even in foreign exchange markets there is always two sides to the story. For the NZD/USD exchange rate value and direction it has to be expected that the USD side of the equation will once again swamp and smother any local NZ influences.

However, the NZD/USD rate is also heavily influenced a third factor, the cold hard economic, investment and business reality that New Zealand is heavily dependent on Australia and where the Aussie dollar travels, we go with it (to a greater or lesser degree at times).

As exporters, importers and investors with assets denominated in foreign currency ponder their FX risk management and hedging strategies for the year ahead, their decisions to position hedging levels towards minimums or maximums of policy limits should be based on an assessment of the following three categories of themes and questions.

US dollar global currency direction in 2022

The US economy and the Fed’s actions: The dominant theme and question is whether the dramatic increases in the US inflation rate last year has already peaked and gradual improvements in the global shipping/supply chain situation allow supply of goods to catch up to the demand? Recent month’s US employment data has provided mixed signals as to whether the US economy has now reached full employment and thus the Fed need to remove monetary stimulus earlier and lift interest rates earlier. The number of new jobs in the Non-Farm Payroll labour market survey have been significantly below market forecasts in both November and December. However, the separate surveyed measure of the unemployment rate has recorded a sharp decrease to 3.90%. Labour shortages have forced annual wages increases above 5.0%, adding to the inflationary pressures from the demand side.

US bond and equity markets are now pricing in the first interest rate hike from the Fed in March, instead of June. Tellingly, the US dollar did not appreciate any further in the forex markets when the minutes of the Fed’s December meeting were released last week confirming that they are adopting a more hawkish stance on tightening monetary policy than what the markets were previously anticipating. Another sign that the FX markets have already fully priced-in US interest rate increases in 2022 and 2023 to the EUR/USD exchange rate at $1.1300.

Investment markets finally react to the candy being removed: Since mid-December the US bond and equity markets have belatedly reacted in an adverse fashion to the now more hawkish Fed. The inevitable equity investor profit-taking in over-hyped listed technology stocks is now occurring as money is no longer free. Likewise, treasury bond investors have also reacted in a delayed fashion to the higher inflation and upcoming  higher short-term interest rates. The 10-year bond yield jumping from 1.50% to nearly 1.80% over the last three weeks.

The conclusion from this latest market volatility is that cash proceeds from selling tech stocks is not going into the bond market, but back into industrials. Cryptocurrency markets have also taken fright alongside equity markets. Typically, the US dollar strengthens on safe-haven buying when equity markets fall, however in another sign that the US dollar bulls are exhausted, the EUR/USD rate has remained above $1.1300 over recent weeks.

Geo-political developments hit the oil market: Civil unrest in the world’s 9th largest oil producer, Kazakhstan, has driven oil prices up from US$65/barrel (WTI) in early December to US$80/barrel. The US dollar normally trades inversely to oil prices, so perhaps all the positives for the USD from the Fed have been outweighed by oil and therefore the US dollar has been unable to make any gains. In early resolution to this latest geo-political risk does not seem likely.

Aussie dollar to continue to dominate Kiwi dollar movements

All the positive factors and forces for the Australian dollar in 2022 listed in our 19 December column remain firmly in train i.e. imminent RBA change in stance, higher wages, commodity prices, superior GDP growth, the massive Balance of Payments surpluses and over-extended long-AUD speculative positions. The AUD/USD exchange rate has bounced around above and below 0.7200 over the Christmas holiday period. The rapid spread of the Omicron Covid variant through Australia may temporarily restrain the expected positive AUD sentiment. However, unlike the health-dominated NZ Government Covid policies, the Aussies balance health and economic factors and therefore refrain from smashing the economy with draconian lockdowns.

Australian economic data being released over coming weeks will feed into the RBA’s deliberations on monetary policy at their next meeting on February 4th. Overseas import/export trade and retail sales figures for November are due this week. Next week sees January consumer confidence and December employment, followed by their December quarter’s CPI inflation numbers on 25th January. All of the economic data will add to the picture that the RBA will be changing their tune on the need for and timing of interest rate increases.

The NZD/AUD cross-rate continues to decline, albeit in a jagged up and down manner. The NZD/AUD rate dipped below 0.9400 last week, depreciating a good three cents from 0.9700 in late September 2021 when we published our special FX report on the cross-rate. That report concluded with a firm view that the NZD/AUD was more likely to reverse direction to three cents (and more) lower than continue upwards to parity. Australia’s economic outperformance and their change in monetary policy to increasing interest rates (ours are already fully priced-into the NZD value) will continue to push the NZD/AUD rate lower in 2022.

New Zealand economy more likely to underperform in 2022

Pertinent questions on how the NZ economy will perform in 2022 and what that means for the NZ dollar value may be summarised as follows from the current vantage point: -

Consumer and property economy: Economic data (consumer confidence surveys) and anecdotal evidence (lower Xmas sales levels for The Warehouse) indicate that there was no pent-up spending bounce back from the August the December lockdown in the Auckland/Northland/Waikato regions. Household spending is subdued under the weight of mortgage/rent increases, higher fuel costs and much tighter credit conditions.

Evidence is also emerging that the inevitable slowdown in the residential property market is already happening.

It appears that the RBNZ have underestimated the rapid tightening in credit conditions in the economy, which is looming as a major problem for already financially stressed smaller businesses as they use their own houses for bank lending security. All adds up to GDP growth in 2022 being considerably below current RBNZ and bank forecasts. Adding to the risks is the distinct possibility that the Ardern Government’s only response to Omicron spreading in the community is to lockdown entire cities once again. It seems it is OK to allow into the country your DJ friend on multiple occasions and somehow exclude ICU nurses! Who says we don’t have corruption in New Zealand?

Export economy: Higher commodity prices and good currency hedging at lower NZD/USD levels helped exporter profitability in 2020 and 2021. The year ahead appears to be even more challenging with the Government providing absolutely no lead on when borders will have a staged re-opening.

However the largest challenge for exporters is securing reliable labour just to continue at current production levels, let alone increase them. Qualified and trained young Kiwi’s will be heading across the ditch at the first opportunity, exacerbating the labour resourcing issue. Bringing in skilled immigrants to provide the resources for the export economy grow is the answer, however the current Government’s immigration policy is headed in the opposite direction.

The net result is an under-performing NZ economy in 2022 and therefore the greater probability that the RBNZ will raise interest rates at a slower pace than current market pricing. However, a weaker USD globally will still push the NZD/USD rate back above 0.7000.

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Source: CoinDesk

*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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25 Comments

Great piece.

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1

You think? 

"Qualified and trained young Kiwi’s will be heading across the ditch at the first opportunity, exacerbating the labour resourcing issue. Bringing in skilled immigrants to provide the resources for the export economy grow is the answer"

NO.  Correcting the balls up that is causing these people to leave is the answer.

So much for a new year and some new mindsets.

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9

Ah yes, the solution to a problem is to ignore the problem and import new ones. 

Flawless, long-term thinking. 

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0

It appears that the RBNZ have underestimated the rapid tightening in credit conditions in the economy, which is looming as a major problem for already financially stressed smaller businesses as they use their own houses for bank lending security.

Looks like Grant and Orr scored an own goal. Let's see how the fans react during the half time.

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1

Adding to the risks is the distinct possibility that the Ardern Government’s only response to Omicron spreading in the community is to lockdown entire cities once again. It seems it is OK to allow into the country your DJ friend on multiple occasions and somehow exclude ICU nurses! Who says we don’t have corruption in New Zealand?

I hope your economic analysis is not as compromised by such ugly bias.

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5

And it's just an outright lie anyway.

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3

Can you back up your statement Lanth? Or do you owe Roger an apology? Corruption at the expense of citizens health.

"“We don’t understand why direct requests by DHBs to expedite MIQ for urgently needed health workers seem to be falling on deaf ears, especially when priority spaces are found for sports teams and other individuals.”

Dalton understands that 100 of the 250 requests made by DHBs in recent months have been rejected – including an application from one overseas ICU nurse who has been rejected six times."

https://www.stuff.co.nz/national/health/coronavirus/126608859/miqueue-h…

"DJ Dimension – New Zealand’s first Omicron community case – is on his third border exemption to New Zealand since the start of the Covid pandemic, the government has confirmed."

https://www.stuff.co.nz/national/300488326/covid19-dj-dimension-on-thir…

 

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2

I think I can help. The DJ got a border exemption but he had to join the scrap for a MIQ place in the lottery with everyone else. He managed to get an MIQ place in December because the lottery was under-subscribed (people had decided to wait for the border controls to relax).

ICU nurses also have no problem getting a border exemption to enter the country - the challenge they face like everyone else is getting an MIQ slot. MoH only have a limited number of guaranteed slots, which they have to prioritise. People might disagree with all this, but it is very transparent. Calling the process 'corrupt' is therefore highly misleading (and beneath this media outlet if you ask me).

       

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4

Roger is the one alleging the DJ is a personal friend of Ardern and that she corruptly let him into the country when he otherwise wouldn't qualify.

He needs to provide the evidence. Which he can't, because it's simply a lie.

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6

Nice Lanth, asking Roger to prove that DJ Dimension is a personal friend of Arderns. Gayford and Ardern are friends of the Rhythm founder who brings in the DJ's - d'uh.. But I guess you knew that. Banana republic stuff and we don't even get the benefit of cheap bananas. At $55 million to run cover, cheap at the price given how economically important foreign DJ's are to NZ. I guess the kiwi DJ's don't cut it.

 https://www.nzherald.co.nz/nz/prime-minister-hits-up-rhythm-and-vines-i…

The British DJ who took Omicron into the Auckland community after breaching home isolation rules is set to avoid prosecution.

The Ministry of Health confirmed to Stuff it does not intend to refer the high-profile managed isolation and quarantine (MIQ) breach of Robert Etheridge, aka chart-topping DJ Dimension, to police.

https://www.stuff.co.nz/national/health/coronavirus/300489658/covid19-d…

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0

So you're claiming that friendship is a transitive property?

That's not evidence, and even if it were true, it still doesn't prove the claim the Ardern personally intervened so this guy could come into the country. What would her motive even be?

You're suffering from Jacinda derangement syndrome if you believe this lie.

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2

So you are looking for an undisclosed text message from Richie Hardcore to tie all this together? Not how this government rolls  - and they have plenty of form with musicians/dealers on immigration matters - just as Chris - I can't put anything in writing - Faafoi.

"Minister Kris Faafoi is under fire for apparently promising to intervene in an immigration process and "speed things up" for Opshop singer Jason Kerrison.

Faafoi, in a series of messages published by Newshub, told the musician he would make some calls, saying: "Bro, its moving. I can't put anything in writing" [sic]."

https://www.stuff.co.nz/national/politics/117990267/broadcasting-minist…

https://www.newshub.co.nz/home/politics/2018/12/tova-o-brien-she-may-no…

 

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1

None of that is relevant to the discussion at hand. So I conclude that you don't have any evidence either.

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2

Bro, its moving. I can't put anything in writing.

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0

Lanth - plenty of photographs  of ardern & Gayford with DJ, as a critical worker perhaps his "services" are more important to the PM than an ICU nurse

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2

To my knowledge there are no photos of them with *this* DJ. There are photos of them with other DJs. There are photos of them with lots of people. Doesn't mean they're friends, or that Ardern is corrupt - just she appears in photos, given her role that's not surprising.

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0

Nice Lanth, asking Roger to prove that DJ Dimension is a personal friend of Arderns. Gayford and Ardern are friends of the Rhythm founder who brings in the DJ's - d'uh.

"One such long term supporter is radio host Clarke Gayford who has MCed the event since its beginnings and thrown in his “2 cents worth” along the way."

https://www.scoop.co.nz/stories/CU0812/S00096/rhythm-vines-grows-up.htm

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0

Facts are not biases. 

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1

It appears that the RBNZ have underestimated the rapid tightening in credit conditions in the economy, which is looming as a major problem for already financially stressed smaller businesses as they use their own houses for bank lending security

An inevitable consequence of using the blunt instrument of monetary policy to achieve socio-economic goals.   

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1

However, unlike the health-dominated NZ Government Covid policies, the Aussies balance health and economic factors and therefore refrain from smashing the economy with draconian lockdowns.

The Australian economy is right now being smashed by omicron but without any government stimulus to make up for the downturn.

From this tweet: https://twitter.com/AdelaideTimbrel/status/1479270993755443201

ANZ data: Spending is at its lowest level since Delta lockdowns. Caution about being in public is compounded by staff shortages to stifle spending across dining, shopping & travel. Syd & Melb spending is now down at lockdown levels, with Sydney at its lowest since COVID began

Some supermarkets have almost bare shelves due to workers being sick, preventing them from doing work.

https://twitter.com/CateOwen/status/1480094235336462338

It is simply a myth that if COVID-19 spreads through the community we would not have any economic impact. People will voluntarily stay home. People will get sick and not be able to work.

The best economic response is a health response that prevents COVID from spreading.

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0

A health response that stops omicron spreading is no longer possible, even Michael Baker says it's a matter of "when" not "if".

Any further lockdowns in NZ will get the worst of both worlds.

 

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0

Good thing the government has pretty much all but ruled out more lockdowns then, eh?

My point is that Australia is doing it very very tough right now, without a lockdown. It is a myth that letting COVID spread uncurtailed has no economic impact. People voluntarily stay home and stop spending. People become sick and can't work. Both of those things have serious economic consequences when they occur en masse. And yes, this seems obvious, but there are people, including on this website, who believe that COVID running rampant in the community is no big deal and that lockdowns are worse for the economy despite the obvious facts that show otherwise.

Even if Omicron is inevitable, that the longer we delay it to allow more boosters and children to get vaccinated, the better we'll be when it arrives.

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0

I missed them ruling out lockdowns. In fact they've been pretty strongly signaling they'd possibly revert to the alert level system again if health systems found themselves overwhelmed. 

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My point is that Australia would be doing worse right now if they were locked down.

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'Qualified and trained young Kiwi’s will be heading across the ditch at the first opportunity, exacerbating the labour resourcing issue. Bringing in skilled immigrants to provide the resources for the export economy grow is the answer"

No. No it most definitely is not the answer.

Providing better employment, educational and living(housing) conditions for NZers is much more  the answer.

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6